Meta: The Asymmetry Factory Continues.

Q1 2025 ER Digest

May 01, 2025

Meta is up 422%+ since I wrote my original Meta deep dive, explaining how Meta was investing for an exponential future (and not blindly betting the house on the Metaverse, as the market thought).

Meta’s Q1 2025 earnings report shows AI is real. And as was the case in 2022, Meta remains a highly asymmetric bet.

The main takeaway from Meta’s Q1 2025 earnings report is that AI is increasingly accretive to the business, by making people spend more time on Meta’s Family of Apps. In Q3 2024 Meta was able to increase time spent on Instagram and Facebook via AI recommendations by 8% and 6% respectively, over the previous nine months. In Q1 2025, Meta increased time spent on these two apps by 7% and 6% respectively, but in just six months. This shows you AI is real and it’s accelerating.

By investing in AI, Meta is enhancing the performance of its core business. This affords Meta more capital to reinvest into its core AI infrastructure, which in turn enables them to make a number of additional asymmetric bets: improved advertising, more engaging experiences, business engaging experiences, business messaging, Meta AI and AI devices. These initiatives are all downstream of Meta building better AI infrastructure and models over time.

Meta is an asymmetry factory.

As Family of Apps continues to grow, as depicted in the graph below, Meta has more capital to invest into its AI core. This increases the odds of any of the above bets working out. And if none of them do, Meta’s AI infrastructure will still continue to enhance the Family of Apps operation. As was the case back in 2022, 81% of Meta’s expenses were directed towards Family of Apps in Q1 2025. In turn, most of Meta’s CapEx is directed towards their AI infrastructure, making this a highly asymmetric situation - as was the case in 2022.

Meta’s business is about delivering more engaging experiences and enhancing its ability to monetise them. To illustrate how improved advertising (and therefore monetisation) is downstream of better AI models, consider Meta’s progress in ad conversion rates. Meta began testing the new model for ads recommendations on Facebook Reels earlier this year and have seen up to a 5% increase in ad conversions. Meta is now rolling this model out to additional services across their apps.

The Q1 2025 earnings call is littered with examples of how Meta is progressing on its various business initiatives by leveraging AI. For example, Meta began testing using Llama and Threads recommendation systems at the end of last year, given the app's text-based content, and have already seen a 4% lift in time spent from the first launch. While there is no guarantee that Meta’s various initiatives succeed, I assign high odds of them doing so, per their relentless iteration and experimentation.

And the payoff for any of these initiatives is gigantic.

For example, Meta is currently on a path to collapse the entire ad value chain into a single AI agent, which saves time for customers and delivers optimal business outcomes. Meta is working on automating the generation of advertisements and on evolving its ad platform to drive results that are optimised for each business's objectives and the way they measure value. If they continue to iterate from both ends, eventually Meta is going to yield an AI model that does all the advertising work for companies.

Additionally, over 1 billion people are now using Meta AI. As Family of Apps continues to grow, Meta has an increasingly dense and rich social graph to provide Meta AI models with unmatched context windows, which will likely give it an edge in terms of personalisation. Instagram knows its users well enough to keep them hooked on a screen for a growing volume of hours over time - an AI that feeds from this data can turn into a persistent and invaluable companion, albeit somewhat dystopian perhaps.

See Zuck’s remarks about this, during the Q1 2025 earnings call:

Across our apps, there are now almost a billion monthly actives using Meta AI. Our focus for this year is deepening the experience and making AI the leading personal AI with an emphasis on personalisation, voice conversations, and entertainment.
I think that we're all going to have an AI that we talk to throughout the day, while we're browsing content on our phones, and eventually, as we're going through our days with glasses. And I think that this is going to be one of the most important and valuable services that has ever been created.

In the graph below, you may notice that the evolution of both Meta’s cash from operations (orange line) and CapEx (blue line) has accelerated. In other words, as Meta has invested more capital into its AI infrastructure, the business has started to print more cash. In my view, Meta is a few years ahead of the rest of the economy in terms of leveraging AI. It is therefore a preview of what AI will do to businesses that use it correctly and is bullish for the Palantir thesis.

Palantir provides the software required for businesses to make sense of their data and ultimately, leverage AI to enhance enterprise value. Over the past few months the market has doubted the strength of the broader AI thesis, but Meta shows how AI is set to create immense value over the coming decade. And ultimately, as Palantir continues to productise its offering and make it easier to deploy and operate, it is positioned to continue growing its business and margins at a notable pace. Palantir’s earnings are on Monday and it will be interesting to see the progress they’ve made this quarter.

Additionally, the market was rather enthused in this sense with Meta increasing CapEx guidance for FY2025 from $60B-$65B to $64B-$72B. However, a substantial part of this increase seems to be due to the uncertainty brought about by the trade war, as Meta CFO Susan Li explained during the earnings call:

The higher cost we expect to incur for infrastructure hardware this year really comes from suppliers who source from countries around the world, and there's just a lot of uncertainty around this given the ongoing trade discussions.
And so that is both reflected in the wider range that we are giving, and we're also working on our end on mitigations by optimizing our supply chain and our outlook is really trying to reflect our best understanding of the potential impact this year across all of that uncertainty.

Nonetheless, the CapEx will continue to go up over time as AI unit economics continue to improve. As Meta makes better AI models, its efficiency in terms of increasing engagement and monetising it will likely go up, which will encourage Zuckerberg and co to carry on investing. As/if the business initiatives beyond Family of Apps play out, Meta will have a broader surface area to amortise its AI investments, driving improved unit economics. For example, RayBan Meta AI glasses has 4X more MAUs than a year ago.

Until next time!

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