Earnings Special: Meta Boosts Bet on AI With Spending Outlook, New Stock Class

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0:20 Meta shares already bouncing around in the aftermarket. The company just out with its earnings. Here are the red headlines on the Bloomberg. Let's get to Outlook. Meta seeing fourth quarter revenue $ 73 billion to $ 76 billion. Folks, that is above estimates of $ 73.

0:35 57 billion.

0:37 The company also establishing a new non-voting class, C Common Stock. There was early reports, was it from Semaphore.

0:45 That talked about this? Yeah, 320 today. Yeah, exactly. Just hit it. We've got what?

0:49 I'm looking at Meta right now up about 1.5% here in the aftermarket. Lots more metrics to come, though, on this one, so we're going to keep a watch on it.

0:56 Yeah, Meta lifting its expense outlook to incorporate a $ 9. 9 billion legal charge. The company sees fiscal year CapEx 135 to 145. billion. So it narrowed that range because it earlier saw 130 to 145. That's now a redhead, just after I mentioned that. Again, the fiscal year capex, 135 to 145 billion, it saw 130 to 145 billion. So it makes sense that as we get further along in the fiscal year, The company also sees total expenses, $ 175 billion to $ 179 billion. So that's an increase because earlier it saw $ 165 billion to $ 169 billion. Shares are off their best levels post-earnings as investors continue to digest this after hours. Okay, let's bring in Ed Ludlow because he knows about all this stuff. Ed is joining us from

1:42 San Francisco. He's the host of Bloomberg Tech on Bloomberg Television. Ed, thanks. I wanted to start with Meta right now. What are your highlights from this? Because certainly some of this was priced in, but we're seeing a narrowing of an understanding of how much it's going to spend on CapEx and its overall expenses climbing. There's a legal charge in there.

2:05 What are your highlights?

2:06 Okay, that's a really good summary. I'll just go through it really rapidly. So revenue of $ 64. 2 billion is up 26% year over year. It's a bit of expectations, but for Meta, as a moment in time, it's their highest revenue in a quarter ever. You've exactly nailed it on EPS. So they took a charge in the quarter of about $ 10 billion.

2:25 And if you excluded that charge, so basically on a non-gap adjusted basis, EPS would be $ 7. 40. Taking the charge into account, it's $ 3. 57. And the CapEx range is just like we're well through the year. And it's narrow, $ 35 billion to $ 145 billion on the CapEx side. Though if you were like an old school Bloomberg editor, you would say that adjusts the midpoint of the CapEx expectation, which against consensus is kind of fun if you're one of those nerdy accounting guys. I apologize to those listening to this program if you are. And then there's the Class C stock. Do you guys want to talk about that?

3:04 I want to talk about that in a second. Before we do that, though, I want to talk about the top line number because it does seem like people are still buying ads and Meta is getting much better at targeting those ads. That's this business. That is the business of Meta still. No matter how much it talks about AI, that is still its business.

3:22 I mean, literally in how it discloses its financials, it is the bulk of revenue. And so the question has always been, for all of the work at the frontier, and Meta still kind of needs to evidence that it is at the frontier from an AI model perspective, how does that improve monetization and ARPU, average revenue per user, on the outside? How does AI make ads more valuable?

3:45 And at the end of the day, the advertising story is just very strong. It's pricing, it's not volume, and that's doing the heavy lifting.

3:55 Meta seeing reality losses of $ 18 billion and $ 19 billion in 2026, fourth quarter tax rate between 15% and 17%. I want to go to this thing, though, because increasingly Meta is dealing with a lot of serious litigation.

4:08 But it doesn't hit the stock. Well, sometimes it does.

4:11 Meta says it still sees scrutiny on youth-related issues globally. Like, there's still a lot legally coming at this company, MetaEd. And we know in the past they've even talked about having a material impact. Does it matter? I mean, are they making it up enough elsewhere that it doesn't matter how much this litigation ultimately costs them? Or no, this is still a serious issue for them.

4:37 So I would say that Meta has disclosed in multiple quarters to this point that the language that youth legal challenges could significantly impact results going forward It's been there in the boilerplate for some time. It's funny, like I was talking to Riley Griffin about exactly this, you know, when the numbers hit and on the message, we like, you know, we had to talk about that one-time charge that hurt EPS in the quarter. There is the Cambridge Analytica headline I think you guys hit from earlier in the day. Like all of this is happening contemporaneously. But Meta has guided investors on its impact, you know, on a forward-looking basis.

5:12 Ed, we didn't get to the dual-class share structure. And there's some information... additional information about what Meta says about the non-voting stock. The board has approved a new class of publicly listed non-voting Class C common stock with an effective date in January, 2027. The goal is to quote, provide Meta the ability to finance its growth and help the company remain a leader among fierce competition, both domestic and international. How does this change in stock structure help Meta at a competitiveness level?

5:48 Okay, so there's the simple mechanism of offering shares to raise money, and they were pretty clear, like they spend it on M & A, AI talent, general corporate purposes, right? Put that to one side. How does this relate to Mark Zuckerberg, who economically, through his class A and class B, has I think about 14% of the company, but from a voting power perspective, he owns 99.8% of the class B shares. Through this mechanism, there's one class C share, for every A or B share, effectively it works like a two for one stock split. Again, how does this impact Mark Zuckerberg? He does not get diluted, but I think what's happening in parallel here is that this is also a mechanism for the board to do what they

6:32 would call a founder-led agreement, where they're like, Mark, you're super important to us, And the things that are going well at Meta right now, namely on the AI side, you need to be with us. You've got to stay with us for the ride. So if you go through some of the regulatory filings that are coming out in parallel, this is as much about Meta creating non-voting stock to give it kind of equity currency in the AI era without impacting Mark's control so he can go out and continue to lead the company. That is my sum of what I think they're doing here.

7:09 But maybe lead the company not from California. He did put out that he may relocate from California. Proposition 40 passes. Proposition 40 passes. I want to bring that into the discussion. There's another headline that I'm not providing. Fiscal year 2027 revenue outlook, which seems important. So take your pick here.

7:32 What we need to know here about all of this stuff.

7:35 Okay, well, Prop 40 in California and on the ballot is a proposal for a one-time 5% tax on billionaires. And it would basically impact him because he is a billionaire and he is resident of California. And he is weighing into the issue. He is saying if Prop 40 passes, in other words, that measure goes through, he could relocate from California The story's just hitting. Sorry, guys. This is really hard. His point... No, that's okay.

8:09 No, no, no.

8:10 His point, according to the company, is that because of his wealth, the makeup of it, how it's structured on equity, the level of it, he would be liable for billions of dollars in tax payments if that were to go through. And so a part of this whole Class C thing, it reads to me, is that this special committee of the board in doing that action is trying to, I don't know, get ahead of it, but I'm just reading the filing. So it's a warning in the regulatory filing that he may move his primary residence. But the same filing talks about what I was going over a minute ago, that a big part of the Class C, separate from the Prop 40 warning, is to keep Mark Zuckerberg in place in his role, but specifically in place at the

9:02 headquarters in California, leading the company in person. That's kind of the link between those two. Fascinating. Yeah. That was fun.

9:11 Okay, Ed. You got me thinking about an interview or a question that you posed to Jensen Wong a long time ago, actually. And I think for me it was the first time, he's been asked this since then, but to me it was the first time I heard him respond about this. And it was about the wealth tax in California. Jensen Wong, among the wealthiest people in the world, his wealth tied up in a stock of a single company that he founded, like Mark Zuckerberg. What did he tell you about his response to Prop 40, and how is it different than what we're hearing in its regulatory filing?

9:49 What I would just point out, according to Bloomberg's measure, Mark Zuckerberg is the fifth richest person in the world. When I asked Jensen Wang on January the 6th of this year, he looked at me with a blank expression and honestly was like, why would you even ask me that? I haven't thought one bit about it. And the next morning, by the way, every newspaper on earth had written up that interview, that question about the billionaire's tax. But he looked at me and was basically like, I am very happy to pay taxes. Pay taxes in California, pay taxes in the United States. He credits the academic institutions in California for the talent pipeline that is there. His own experience of being the American dream. And he reflected on

10:37 the idea that lots of his employees are in California. So at that time, whatever the measure was that was being discussed, he's happy to pay taxes. And he's since been asked about it a few times, right? And I think his answers have been quite consistent with what I just outlined.

10:59 Well, it's... Well, you know, Mark Zuckerberg has this more than $ 100 million compound on Indian Creek in Florida that he's already bought.

11:10 Yeah.

11:12 Zuckerberg, yeah. That was in the news headlines.

11:17 Well, is he going to be homeless? Well, no.

11:21 Guys, he has the cattle ranch in Hawaii that he spends all his time at. Yeah.

11:29 I'm just saying, listen, I don't want to be saucy here and get into trouble. But I just think, you know, we've had these conversations about you talk to some really wealthy people and they say, you know what, I get it. You know, income and wealth and how things are taxed, it's different. And so understand contributing more to society. I always think about a podcast where a very wealthy individual outside the United States talked about, I don't want to be rich in a poor country. And I keep, that just stays with me. And so... I don't know. I find what Jensen had to say super refreshing. Listen, we're going to continue watching Meta at top of mind for you as we get ready for the call. Is this a good read on AI? Is this a good read

12:08 on Meta in terms of what we got, the results? And what would you, what's top of mind here?

12:13 So like CapEx for this year narrowed, right? The range 135 billion to 145. It's highly unlikely they're going to give some kind of very detailed picture for 27. Like that, you know, that we might find out at the end of the year. But what they said in the statement was kind of weird. Like, they didn't give any guidance for the top line for next year, but basically said, like, things are looking really good. So you'd imagine that they would get some questions about that. I think just purely in reaction to this confusing situation with the Class C shares, you know, the regulatory filing, which came out after the press release, has linked this position on Prop 40... to the board's efforts to keep Mark Zuckerberg in place. I

12:53 think I did a good job explaining that link, but people inevitably will want to understand that as opposed to just issuing stock to raise capital. I don't think it is that. I think it's a part of a plan to keep Mark engaged as the leader of the company for a long time. Yeah.

13:11 So, Ed, before we let you go, Meta's not providing a fiscal year 2027 revenue outlook. From what we heard about the company's CapEx spend... What we understand about cash flow, too, with this increased spending. Is this a sign that the AI trade is intact?

13:27 But the thing is, like, negative free cash flow, Meta's kind of held the hand of the market to that. And when it happened to Amazon, no one batted an eyelid. When it happened to Oracle, everyone freaked out. like it was 1992, because I think that was the first time it happened since 1992. But yeah, people seem to just not really worry about that if you have the revenues and balance sheet of those companies at Amazon and Meta's scale.

13:55 Man, just a lot of moving parts to this one. Ed Ludlow, you did explain it really well. And I am very much like most people eager to hear what... Mark Zuckerberg and team have to say on that call with analysts.

14:07 All right.

14:08 He is Bloomberg Tech host Ed Ludlow in our San Francisco bureau.