In recent weeks, the financial markets have witnessed a significant uptrend, particularly within the S&P 500, where about 77% of its constituent companies have reported their Q4 earnings. The results tell a promising story: earnings per share (EPS) showed a year-over-year increase of 16.9%, with 76% of these companies exceeding market expectations. Meanwhile, revenue also trended positively, with a 5.2% rise compared to the previous year and 62% of companies beating forecasts. The forward price-to-earnings (P/E) ratio now stands at 22.2, indicating robust economic fundamentals in the United States. This data suggests that there will be no significant economic or earnings releases expected to sway market direction in the near term. With NVIDIA's strong rebound and U.S. stocks approaching new highs, the unsettling impact of DeepSeek on the equity market seems to have calmed, leading to a more rational trading environment.

Amid this environment, this report will delve into one of the strongest stocks in the U.S. market, Meta. After facing stagnation in user growth and seeing large investments in the metaverse without immediate returns, Meta's stock has made a remarkable comeback, soaring nearly tenfold over the past two years. Despite this incredible growth, investment banks on Wall Street continue to respond optimistically by setting even higher target prices. Let’s explore the underlying factors driving Meta’s ascent and Wall Street’s perspective on the company's trajectory.

Company Overview

Meta Platforms, Inc., formerly known as Facebook, Inc., is a globally recognized technology titan headquartered in California, USA. The company specializes in social media, virtual reality (VR), augmented reality (AR), and artificial intelligence (AI) technologies. Its core products encompass popular platforms such as Facebook, Instagram, WhatsApp, and Messenger, along with VR devices like Meta Quest and the metaverse platform Horizon Worlds. Meta’s revenue model is largely driven by advertising services and innovative solutions, pushing the boundaries of video content and generative AI within its business operations.

Meta is determined to forge the "metaverse" by leveraging technology to connect individuals, aiming to provide users with immersive digital interactions. With its robust social ecosystem, cutting-edge AI technology, and ambitious ventures into virtual reality, Meta is transforming from a traditional social media company into a pioneering force within the realms of the metaverse and AI.

Reasons for Momentum

The latest quarterly earnings report from Meta reveals that revenue from its Family of Apps (FoA) segment is growing slightly faster than the company’s overall revenue. Notably, advertising revenue constitutes nearly 99% of this segment. Furthermore, the operational revenue growth in the FoA segment has exceeded its revenue growth rate, achieving an increase of over 34%. Consequently, the profit margin in this sector has widened by more than 600 basis points, now surpassing 59%. In Q4, daily active users across Meta's platforms—Facebook, Instagram, and WhatsApp—rose by 5.0% year-on-year, reaching a staggering 3.35 billion.

According to research by Grand View Research, the global digital advertising market is projected to expand at a compound annual growth rate (CAGR) of 15.4% from 2025 to 2030. Given Meta’s stable and growing user base, this anticipated growth presents a substantial opportunity for revenue enhancement, implying that the company’s primary revenue sources will continue thrives.

The introduction of Meta AI has been pivotal in enhancing user experiences, a vital factor contributing to expanding its customer base. For instance, the personalized content recommendations on Facebook and Instagram ensure users are exposed to content tailored to their interests. Additionally, Meta AI employs users' purchasing habits and browsing history to curate personalized suggestions in Facebook Marketplace.

Another pivotal growth driver for Meta is its monetization strategy in new arenas, such as the Reels feature. The expectation is that by 2025, at least 2 billion people will engage with Reels-related content, with Facebook and Instagram facilitating over 200 billion Reels views daily. Moreover, these Reels show engagement rates approximately 22% higher than standard content. The significant potential for generating targeted advertising revenue speaks volumes, and Instagram Reels usage surged by over 57% last year. This data underscores Meta's ability to sustain growth in advertising revenue from a rapidly expanding audience segment.

Turning to Meta's Reality Labs, this division reported a year-over-year revenue increase of 301%, reaching $1.08 billion after three consecutive quarters of slow growth. While operating losses have widened as anticipated to $4.9 billion, the acceleration in revenue for this segment is viewed positively. Additionally, Mark Zuckerberg has expressed confidence regarding market demand for the company’s Ray-Ban Meta AI smart glasses.

Looking ahead, Zuckerberg identifies 2025 as a pivotal year that will determine whether smart glasses can indeed become the next computing platform. Meta has consistently pursued the goal of transforming smart glasses into a pivotal vehicle for AI, showcasing an augmented reality headset called "Orion" designed to facilitate seamless interaction between the physical and digital spaces. Andrew Bosworth, the Chief Technology Officer at Meta, concurs, asserting that 2025 could be critical for Reality Labs, fueled by a belief in their exceptional product portfolio and plans to launch over ten additional AI-driven wearable devices, possibly marking a moment akin to Apple’s introduction of the Macintosh.

The Impact of DeepSeek on Meta's Strategy

In contrast to the impressive strides made by Meta, the Chinese AI company DeepSeek has recently launched its R-1 reasoning model. This model matches the performance of OpenAI's o1 model but operates at merely one-thirteenth of its cost, which has sparked a reevaluation of valuations among Wall Street's Silicon Valley tech companies.

Shortly after the R-1's launch, Microsoft's CEO Satya Nadella highlighted a phenomenon known as the Jevons Paradox on Twitter, indicating that as something becomes cheaper and more accessible, consumption tends to rise. In this context, more affordable models like R-1 should encourage companies to hasten their utilization of AI, leading to increased demand for reasoning calculations and, correspondingly, a higher need for computational power.

This logic aligns with the ideas of both Nadella and Zuckerberg, as both companies outline their capital expenditure plans for fiscal year 2025, aiming to establish the necessary capabilities, especially as the broad application of AI becomes increasingly apparent among businesses and consumers.

During the earnings call, Mark Zuckerberg elaborated on his views concerning the AI infrastructure and the business implications of DeepSeek's offerings:

“There are many exciting aspects of DeepSeek's R-1 model that we are still studying, and we hope to incorporate some of its elements into our systems. Formulating a definitive perspective on what it means for the development trajectory of our infrastructure and capital expenditures is premature. As more of these reasoning models emerge, there could be debates about the proportion of computational infrastructure utilized for pre-training versus reasoning. It's highly plausible that a significant portion of efficacy will not necessarily fall on pre-training. However, that doesn’t imply a reduction in computational needs; rather, to generate higher levels of intelligence and offer superior quality of service, more computational power could be allocated at the reasoning stage.

“This field is evolving rapidly, and I believe that substantial investments in capital expenditures and infrastructure will confer a strategic edge in the long run. For now, I can confidently assert that the ability to construct such infrastructure will be a substantial advantage for service excellence and achieving the scale of service we envision.”

Moving forward, Meta is likely to integrate some of R-1's innovations into its frameworks, enhancing user engagement through superb recommendation engines and generative AI content tools while optimizing monetization through super-personalized and targeted advertising. Thus, obtaining high-performing models at lower infrastructure costs is an extremely positive development, as it will not only spur greater adoption of generative AI among users and advertisers but also enable Meta to secure heightened returns on investment (ROI) from its infrastructure expenditures.

AI Technologies and GenAI Ecosystem Strategy

Strategic technological upgrades are critical for Meta’s positioning within the AI landscape. To support the implementation of generative AI, the company plans significant ramp-up in its AI expenditures over the next few years. Reports suggest that executing generative AI goals may demand capital capacities in the range of hundreds of billions to build robust supporting infrastructure. Currently, Meta's AI chatbots and AI-enhanced Ray-Ban smart glasses are widely utilized and yielding positive feedback. Additionally, the company is poised to unveil the new Llama 4 AI model early next year, boasting substantial improvements in reasoning capabilities and response speed, reinforcing Meta's leadership in the AI ecosystem.

Another noteworthy element is the substantial investments being made in the AI sector. This year, the company aims to allocate roughly $65 billion toward AI, significantly exceeding last year's $38-40 billion spending and surpassing analysts’ projections of $50.25 billion. Such sizable investments underscore the management's commitment to adopting state-of-the-art technologies to elevate user experience and operational efficiency.

Financial Performance

In its latest quarterly report, Meta revealed revenues of $48.39 billion, surpassing analysts’ expectations of $47.03 billion. Earnings per share reached $8.02, outstripping projections of $6.77. According to data from Benzinga Pro, Meta has exceeded analysts' expectations across revenues and earnings for eight consecutive quarters. Total revenues grew by 21% year-on-year. The daily active user count in its app family saw a 5% increase, totaling 3.35 billion. Furthermore, ad impressions surged by 6% year-on-year, while the average ad price rose by 14%. Costs and expenses amounted to $25.02 billion, up 5%, with capital expenditures reaching $14.84 billion. The company maintains cash, cash equivalents, and marketable securities totaling $77.81 billion, with long-term debt of $28.83 billion, spotlighting a workforce that has climbed to a total of 74,067 employees, reflecting a 10% increase year-on-year.

Meta distinguishes itself as a strong cash-generating social media company with a vast amount of free cash flow consistently available. The Q4 results showcasedMeta's achievement of $13.2 billion in free cash flow, marking a 14% increase compared to the previous year. The free cash flow margin for Q4 was 27.2%, down from 38.2% in Q3 2024 and 28.7% in Q3 2023, due mainly to a sharp rise in capital expenditures, notably in AI investments.

Institutional Predictions

RBC Capital has maintained a “outperform” rating on META, raising its price target from $700 to $800. Analysts noted robust prospects for META's advertising revenue and technological innovations, projecting that this will continue to drive the company's stock price higher.

Goldman Sachs has also kept a “buy” rating on META, bumping its target price from $688 to $765. Analysts believe that METAs's continuous investments in advertising technology and virtual reality will reinforce its market leadership.

Benchmark raised META’s rating from “hold” to “buy,” maintaining a target price of $820, while analysts express optimism regarding META's potential in the metaverse and AI, expecting expansion in these areas to further drive the company’s growth.

Barclays upheld its “overweight” rating on META, adjusting the price target from $630 to $705, with analysts confident that META's advertising technology and content platforms will consistently deliver revenue increases.

Lastly, Wells Fargo has retained its “overweight” rating on META, increasing its price target from $685 to $752, with analysts favoring META's tactical maneuvers in advertising and virtual reality.

Chinese Investment Network Chief Analyst Brant summarized the recent market dynamics: “Last week, the S&P 500 reached new heights, with the Nasdaq approaching its own records. Having digested the panic surrounding DeepSeek, the U.S. market has re-established an upward trajectory. This week, we anticipate Elon Musk unveiling ‘the world's smartest AI — Grok3,’ which could further boost both Tesla and the Nasdaq. Additionally, the imminent announcement of the Federal Tax policy from the President could significantly benefit the stock market.

From a market perspective, the SP500 has reached new heights, while the Nasdaq’s 30-minute chart showcases a solid upward trend. There are no visible reasons to adopt a bearish outlook, and it would be wise to ride these positive waves. As the saying goes in U.S. markets, never short a new high.

On a different note, small-cap stocks seem relatively weak, although they're currently consolidating within a support range; thus, I remain bullish after a period of consolidation. It's essential to emphasize small-cap stocks as the seven giants within the Nasdaq trade at high valuations, but given the overall inclination for dual market elevation, emergent opportunities could arise among small caps in AI applications.

The narrative concerning Chinese concept stocks is far from over; they remain a pivotal part of my bullish outlook for the year, representing a re-evaluation between Chinese and A-share assets. Major Wall Street institutions have begun reallocating toward A-share assets, especially considering the current ambiguity in U.S. stock policies, rendering Hong Kong and A-share assets particularly appealing. Although the recent surge has been considerable, my profit margins are healthy enough to justify buying in on dips.

Tesla (TSLA) presents a compelling case for long-term investors to engage at its current levels, negating worries regarding price fluctuations between $300 and $280. If the targets hover around $600, those marginal differences become less consequential. I am committed to holding onto small-cap stocks (TNA), Tesla (TSLA), and Boeing (BA) as we find ourselves only at the beginning of an uptrend. Nonetheless, I may consider realizing some profits in Bilibili (BILI) and the triple leveraged Bullish China ETF (YINN) given their notable gains. Overall, I endorse a positive and constructive perspective on the market's trajectory. For a full briefing on strategies and further discussions, feel free to connect via WeChat at chinesefn2022.