Meta

Meta’s December quarter results and guide provided the latest evidence that AI is materially accelerating the business at scale, boosting shares by 6% in after hours following a 5% move higher over the past week. The outlook for revenue growth was impressive, borderline hard to believe, calling for 33% growth at the high end of the range, an acceleration from 24% in the just reported December quarter. If they deliver on projections, revenue growth would be the highest since September of 2021, off a sales base that has about doubled over the past five years, pushing the law of large numbers to the side. Additionally, AI is improving engagement across the Family of Apps, up 7% y/y to 3.6B daily users. In September of 2024, DAU growth was 4.8%, representing faster growth off a bigger base. Lastly, Zuckerberg hinted that more products will come in the months ahead from Superintelligence Lab, which we believe will include a new foundational model.

Zuckerberg is aggressively investing in his new vision of the metaverse, as evidenced by the top talent hire of Apple's head of design, Alan Dye. Back in 2021, when Facebook changed its name to Meta, the company defined the metaverse as an immersive digital world you would step into, with Horizon Worlds and Quest headsets at the center. At Meta Connect in September, Zuckerberg revised that definition. The metaverse is now a blend of AI glasses and virtual reality, with the real world as the canvas and an assistant in your line of sight. That’s bad news for VR and good news for the new canvas Dye will now paint.

At Deepwater, we own shares of META, and we believe the company is well-positioned to leverage AI at scale to drive ad-revenue growth. That said, I’m disappointed in one of the company’s most recent AI products. We tested Meta AI running on the new Meta Display in a side-by-side comparison against ChatGPT’s video conversation tool running on an iPhone. Meta AI understood about 90% of prompts and delivered satisfactory answers roughly half the time, while ChatGPT understood 100% of prompts and provided satisfactory responses 98% of the time.

Meta is putting a lot of effort into wearables, but based on our recent testing of the new Meta Display, they have a long way to go before they get the right formula. We ordered our Meta Display as soon as it was announced and got it 26 days later. Our bottom line is that while the tech is impressive, we find it hard to recommend the product based on its limited use cases. However, we continue to believe Meta is making the right move by investing around $18B annually into Reality Labs, but the return on that investment will take years.

Here are the five pressure points for this Wednesday and Thursday’s earnings from Google, Meta, Microsoft, Amazon, and Apple (and an Nvidia bonus). Big picture: The setup carries more risk than it did three months ago, as investor confidence is notably higher heading into this round of reports. That said, the key takeaway will likely remain that we are still in the early stages of AI adoption, and the largest technology companies continue to hold their ground.

The road to purchasing Meta Display led through a local Best Buy, where a mandatory demo was required to ensure proper fitting. In the end, I found the technology impressive, the use case still limited, and the fashion grade below average. The bottom line: Meta is making the right move by investing $20B annually into Reality Labs, but the return on that investment will take years.

Apple’s decision to shelve Vision Pro in favor of glasses underscores that the optimal AI-first form factor is still unsettled. Apple is now following Meta’s push into glasses, while Jony Ive joined OpenAI in May to pursue a different path: a screenless pocket companion. I believe the phone will remain the dominant AI-first device over the next three years. Beyond that, the shift will move toward pocket companions that work alongside phones and watches. Glasses, despite Apple’s pivot, are likely capped at a few hundred million units a year, limited by comfort, privacy, and fashion.

When Zuckerberg paints his vision, I need a week to put into context where he's going. At Meta Connect he described a future where stylish glasses, powered by AI assistants, become the new computing platform, effectively delivering “personal superintelligence” to every user. Meta is investing roughly $100B per year into these technologies, factoring in Capex and Reality Labs losses, so the question is not whether or not they can build them, but whether people will want them. I believe glasses will take about five years to gain traction, and compelling personalized AI will take about three years. Once there, this technology should become central to consumer computing.

Meta Connect 2025 showcased Zuckerberg’s commitment to making glasses the preferred AI interface of the future, ahead of the phone. The lineup of four new models, priced between $379 and $799 (compared to Apple’s $3,500 Vision Pro), signals Meta’s ambition to sell tens of millions of units next year, up from about 5 million in 2025. Still, the incremental revenue will be so small that it will be hard to notice (adds 1% to Street estimates), and making the technology truly work remains a challenge.

Meta's blowout quarter was the best example to date of AI having a tangible impact on revenue and earnings growth at scale. The question of whether AI has an ROI can be put to rest. Going forward, Zuckerberg is staking a claim to superintelligence, a dynamic in AI that experts debate in terms of feasibility. If he nails superintelligence, Meta shifts from an ad company to an AI powerhouse.

We evaluated AI’s staying power based on March earnings from key tech providers. Growth rates are not slowing as quickly as many investors had feared, suggesting that AI’s momentum remains intact. Concerns about the pace of improvement in AI models may actually strengthen the case for increased investment. Fundamentals and the outlook for AI growth and investment are either stable or improving compared to three months ago — despite ongoing uncertainty around tariffs, macroeconomic conditions, and the speed of model innovation.

Meta's March earnings exceeded expectations and the company raised revenue guidance for June. To date, these results are the best example of a company seeing measurable returns from AI. Increased engagement and improved margins highlight the operational benefits of AI at scale. The best part for Meta is they're just getting started.