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Meta Platforms (META) delivered a stellar 1Q25 earnings report, surpassing expectations with robust advertising revenue growth and a significant EPS beat, driven by AI-powered ad optimization and sustained user engagement across its 3.43 bln daily active users. The company reported $42.31 bln in revenue, up 16.1% yr/yr, and EPS of $6.43, exceeding estimates by nearly 23%, fueled by a healthy 41% operating margin. META’s Q2 revenue guidance of $42.5–$45.5 bln, also above consensus, signals confidence in continued ad demand driven by its AI-powered tools, while its lowered FY25 opex guidance indicates a pullback in spending for its loss-generating Reality Labs segment.

However, elevated FY25 capex guidance of $64-$72 mln, reflecting aggressive AI and infrastructure investments, poses a risk to META's profitability, especially if global ad spending weakens amid strengthening macroeconomic pressures.

• META’s Q1 EPS increased 37% yr/yr, propelled by a combination of strong revenue growth, operational efficiencies, and disciplined capital allocation. Advertising revenue, which accounts for the bulk of total revenue (approximately 98%), grew 16% yr/yr to $41.39 bln, easily outpacing Alphabet's (GOOG) Q1 ad revenue growth of 8.5%. Operating margin expanded by 3 ppts yr/yr to 41%, reflecting cost discipline in the Family of Apps segment. Once again, the main drag on earnings was Reality Labs, which posted an operating loss of $(4.21) bln.
• The robust ad revenue growth reinforces META's leadership position in digital advertising, providing solid evidence that its massive AI investments are paying off. AI tools, particularly the Llama models, have been instrumental in driving this strong growth, enhancing ad targeting and efficiency. AI algorithms, including Llama 3, have improved ad relevance, increasing return on ad spend (ROAS) for advertisers. 
• META's strong positioning with advertisers is also illustrated by the 5% increase in ad impressions. Although growth slowed a bit from 6% last quarter, ad impressions are still benefitting from increased user time spent, driven by AI-curated content. Notably, Instagram Reels engagement is up by about 20% yr/yr.  Meanwhile, average price per ad jumped by 10%, up from 6% last quarter, highlighting the company's pricing power through AI-driven ad efficiency and premium placements. AI tools, including Llama 3, are enhancing ad relevance and return on ad spend (ROAS) for advertisers.
• META's aggressive AI push will continue in FY25 with the company raising its capex guidance to $64-$72 bln, up from $60-$65 bln. In the near-term, elevated AI capex and ongoing Reality Lab losses -- $15-$20 bln in losses projected for FY25 -- will create a profitability headwind. However, META's AI investments are driving ad efficiency and supporting new revenue streams, such as Threads and WhatsApp. By 2027, WhatsApp's monetization is expected to reach $10 bln.

META's impressive Q1 earnings report underscores its dominance in digital advertising, with AI-driven ad growth, operational efficiency, and a 6% increase in family daily active people (DAP) fueling an sizable EPS beat. For FY25, tailwinds from ad resilience and AI monetization are tempered by regulatory, macro, and competitive headwinds, but META is positioned for long-term growth, bolstered by genAI and new platforms like Threads.