META Q2 Deep Dive: AI Investment Drives Engagement, Margins, and Product Expansion

Social network operator Meta Platforms (NASDAQ:META) reported Q2 CY2025 results beating Wall Street’s revenue expectations, with sales up 21.6% year on year to $47.52 billion. On top of that, next quarter’s revenue guidance ($49 billion at the midpoint) was surprisingly good and 5.9% above what analysts were expecting. Its non-GAAP profit of $7.14 per share was 21.8% above analysts’ consensus estimates.

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StockStory’s Take

Meta's second quarter saw a positive market reaction, as management attributed the results to increased engagement across its family of apps and improved ad performance. CEO Mark Zuckerberg highlighted that AI-powered recommendation systems and ad tools drove significant gains in both user time spent and ad conversions. CFO Susan Li pointed to strong adoption of generative AI features in ad products, particularly among small and medium advertisers, and called out improved infrastructure and lower legal costs as additional contributors to margin expansion. The quarter's results were further supported by rising demand for business messaging and ongoing momentum in Meta's hardware segment, including AI glasses.

Looking to the next quarter and beyond, Meta’s outlook is shaped by continued investment in AI infrastructure and talent, with management focused on scaling up its AI models and broadening the reach of Meta AI. Susan Li indicated that higher infrastructure and compensation expenses will be key drivers of future costs, while Zuckerberg emphasized the long-term ambition to deliver 'personal superintelligence' to billions of users. The company plans to deepen the integration of AI across products, enhance content personalization, and gradually introduce new ad formats on platforms like WhatsApp and Threads. Management warned of potential regulatory headwinds in Europe that could impact revenue in coming quarters.

Key Insights from Management’s Remarks

Management attributed quarterly outperformance to strong AI-driven ad products, expanding engagement, and ongoing investments in infrastructure and technical talent.

• AI-enhanced ad performance: Meta’s AI-powered ad recommendation models drove notable increases in ad conversions, with management citing a 5% lift on Instagram and a 3% lift on Facebook. Improved generative AI features for ad creative are expanding adoption, especially among small and medium businesses, helping advertisers optimize campaigns with fewer resources.
• Content engagement growth: AI advancements in recommendation systems resulted in higher user engagement, including a 5% increase in time spent on Facebook and 6% on Instagram. Video engagement, particularly on Instagram and Facebook, rose over 20% year-over-year, supported by better ranking systems and promotion of original content.
• Business messaging traction: Meta reported strong growth in business messaging, with U.S. click-to-message revenue up over 40% year-over-year. The adoption of website-to-message ads is driving more businesses to integrate messaging as a key customer interaction channel.
• Hardware segment momentum: The Reality Labs unit saw increased demand for AI glasses, particularly the Ray-Ban Meta line, with continued supply constraints on popular models. The launch of new performance-oriented glasses like Oakley Meta HSTN further diversified Meta’s hardware offerings.
• Operational discipline: Despite heavier investments in infrastructure and AI talent, operating margins improved, driven by lower legal costs and targeted hiring. Management noted that most headcount growth is concentrated in AI-related functions, with other areas remaining tightly controlled.

Drivers of Future Performance

Meta’s future performance will be influenced by large-scale AI investments, evolving content and ad experiences, and regulatory factors in key markets.

• AI infrastructure expansion: Management expects significant expense growth in 2026, primarily due to rapid scaling of AI infrastructure. Susan Li described upcoming increases in depreciation, operating costs, and external cloud services as central to meeting anticipated demand for AI-driven product enhancements and new models.
• Content and ad platform updates: The company is rolling out more adaptive recommendation engines, further original content promotion, and new ad formats across WhatsApp and Threads. Zuckerberg described plans to deepen personalization and expand Meta AI’s utility, while warning that monetization of new AI products will lag user adoption by several years.
• Regulatory and market risks: Li highlighted potential negative impacts from European regulatory changes, particularly around privacy and ad targeting (e.g., the Digital Markets Act). Meta continues to engage with regulators and adapt its ad offerings, but management cautioned that further changes could materially affect European revenue.

Catalysts in Upcoming Quarters

In coming quarters, the StockStory team will be watching (1) the pace of Meta AI adoption and engagement across Facebook, Instagram, and WhatsApp, (2) operational execution on scaling AI infrastructure and integrating new ad formats on emerging platforms like Threads, and (3) the outcome of regulatory discussions in Europe, which could impact both user experience and revenue in that region. Sustained progress in AI-driven content personalization and hardware supply improvements will also be key signposts.

Meta currently trades at $790.60, up from $695.37 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free).

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