Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
Global Head of Investment Strategy
Meta Platforms steps into the earnings spotlight this week, with investors keenly awaiting signals on how the social media titan is handling stormy trade winds and an intensifying AI race. With a market cap of USD 1.3 trillion, Meta's results won't just be another earnings report—they could set the tone for the tech sector as a whole.
“Meta’s earnings aren't just a financial snapshot—they're a litmus test of whether AI innovation can shield growth from global trade headwinds. Investors who understand this will stay one step ahead.”
Wall Street expects Meta to deliver earnings per share (EPS) around USD 5.25, up 12% from last year’s USD 4.71. These figures sound promising, especially given last quarter's dazzling performance—when Meta beat expectations by a hefty 20%, powered by strong ad revenues and efficiency gains.
Yet, investors should temper their enthusiasm. Meta's lofty valuation leaves little room for error, making even slight misses potentially punishing.
At the heart of investor anxiety lies a looming tariff threat. The Trump administration’s tariff hikes on Chinese imports are no small problem for Meta, given the company’s heavy reliance on Chinese e-commerce giants like Temu and Shein. Analysts estimate this risk could cost Meta as much as USD 7 billion in lost ad revenue this year alone.
China has contributed significantly to Meta's ad growth, with the company generating about 11% of its total ad revenue from Chinese advertisers last year. A reduction here would not just affect short-term earnings, but also cast doubt over Meta’s growth narrative for the coming years.
Investors should be alert: management commentary around tariff impacts will be critical. Clear strategies for offsetting losses or diversifying ad revenues could ease investor nerves, while ambiguity could spark volatility.
Against the backdrop of uncertainty, Meta’s forward guidance becomes even more pivotal. Investors will listen carefully to how executives address the tariff fallout and economic headwinds. Does management see a path for stable revenue growth? Or are they cautious about the coming months?
There's some cause for cautious optimism: Meta’s advertising model, heavily skewed toward measurable, performance-based marketing, often shows resilience during economic turbulence. However, any cautious tone or indication of weakening demand could sharply sour sentiment.
Amidst macroeconomic pressures, Meta’s growing investments in AI-driven advertising products, especially its video product Reels, might offer a silver lining. Amid ongoing regulatory concerns around TikTok in the US, Meta’s platforms have managed to capture substantial shifts in advertising budgets. If this continues, the company might successfully mitigate some tariff-related impacts.
Yet AI comes at a cost. Meta’s capital expenditures for 2025 are expected to remain high, around USD 60-65 billion. Investors must weigh carefully whether these substantial AI investments justify short-term pressures on profitability.
As Meta’s CEO Mark Zuckerberg often emphasizes, AI isn't merely a feature—it's the future of the business. Meta’s ability to balance aggressive spending with visible returns will be a crucial indicator of long-term success.
Meta has recently improved cost discipline significantly, but investors will want assurances that spending won’t spiral out of control, especially with AI investments and Reality Labs (Meta's virtual reality division) losses mounting.
If Meta can keep costs under control while clearly outlining its growth path through tariff disruptions, investors could remain positive. But a surge in costs without clear returns would quickly alarm investors.
Despite tariff headwinds, analysts remain bullish, with average price targets suggesting significant upside potential—nearly 30% above current levels. Yet, after falling more than 10% this year amidst escalating geopolitical risks, Meta’s shares sit at a crossroads: attractive to value-hunters, but vulnerable to disappointment.
Investors should approach Meta with clear eyes. Near-term volatility could be intense, yet the company's long-term fundamentals, dominant industry position, and solid financial health remain intact.
Meta stands at a critical juncture, grappling with tariff disruptions and the costly AI race. This earnings release isn't just about numbers—it's about confidence. Investors must navigate carefully, but those with a clear view of Meta’s core strengths may find opportunities amid the turbulence.
As the bell rings on Meta’s earnings this week, investors face a defining question: can Meta’s resilience outlast the storm?