We Study Billionaires - The Investor’s Podcast Network - TIP848: Meta (META): What the Market Misses? w/ Daniel Mahncke & Shawn O'Malley

Episode Date: September 24, 2026

Daniel Mahncke and Shawn O’Malley revisit Meta Platforms (NASDAQ: META), the advertising machine behind Facebook, Instagram, and WhatsApp that reaches 3.6 billion people every day — over 40% of the world’s population — and just grew ad revenue 27% to a nearly $240 billion annual run rate. Yet the stock trades more than 20% below its highs, because the money is going out even faster than it’s coming in: operating margins fell from 43% to 31% in a single year, quarterly free cash flow collapsed from $8.5 billion to $784 million, and capex guidance now sits at $130–145 billion this year — with analysts penciling in $200 billion for next. Daniel and Shawn dig into what all that spending actually buys. Is this Mark Zuckerberg’s third failed attempt to turn Meta into a platform — after the FarmVille-era Facebook apps and a $100 billion metaverse — or does AI finally make the vision real, whether through AI glasses, a personal agent, a budding cloud business, or an ad engine where every pixel becomes sellable inventory? They also cover Meta’s $17 billion settlement with 47 states over teen safety, the special purpose vehicles keeping tens of billions of data-center debt off Meta’s balance sheet, why Apple is quietly taking the opposite side of Meta’s bet, and why Wall Street rewards Google for the same capex it punishes Meta for. In the end, Daniel rebuilds his valuation model from scratch and decides whether Meta finally earns a spot in The Intrinsic Value Portfolio. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro (00:01:54) About Zuckerberg’s Platform Dream (00:11:52) Why Meta was sued and how it settled (00:25:18) What the regulatory risk means for Meta’s future (00:30:56) What Meta’s AI vision looks like (00:39:00) How AI could revolutionize Meta’s Ads Business (00:42:02) About the optionality of WhatsApp (00:53:21) Why AI could make Meta glasses a success (01:06:58) How Meta is planning to build a Cloud Business (01:22:46) Meta's valuation discussion (01:26:29) How much Meta's stock is actually worth (01:26:51) Whether META will be added to The Intrinsic Value Portfolio Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. 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You're listening to TIP. Welcome back to the Investors podcast, episode 848, and the last stock I pitched to you, Sean, was Copa, which is a company that we looked at last year. And today, we'll have yet another company that we covered before and that deserves another look. And that company is Meadow. And I can only spoil that. I started building a position in it in my personal account not too long ago. It's only been nine months since we first covered Mehta.

but it does somehow feel like an eternity ago with all the news that's come out from the hyperscalers this year and just a couple of months pass and you already feel like you need to discuss the opportunity again and provide an update and that's what we're doing today. I'm not sure if you remember, but last time in the episode, you said that you would like to wait for the stock to drop further and perhaps see sort of an advertising downturn before you would actually go out and buy matter. And we didn't really see an advertising downturn, but the stock still declined about 25% from yearly highs on some other news that I'm quite sure we will get into today.

Let's get into it. Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice.

intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Daniel Manka. There's so much going on that it's difficult to even know where to start today, Daniel. Perhaps we go with what has changed since our first episode in January on meta. And some of the most notable things have probably been meta announcing that it's it would build a cloud business, more or less, and that there is, or better said, was a major lawsuit hanging over meta said. Yeah, I think it was safe to say there was no shortage of news, unsurprisingly, whenever it

comes to matter. And just for context, in January of this year, Mark Zuckerberg announced on threats, which is sort of their equivalent to Twitter or X that matter wants to build out AI infrastructure at scale. And he talked about building tens of gigawatts of data center capacity. this decade, which means hundreds of gigawatts or more over time. So thinking the next couple of decades. And just for context, a single gigawatt is roughly the output of a nuclear reactor. So we're talking about quite a lot of energy here. And for that project, he even brought in

Dina Powell McCormick, who is a former government official. And she's sort of working as a president and vice chairman on that project explicitly there for just working on government partnerships and to finance the build out of these data centers. It's a fascinating hire, I think, in itself. When your CAPEX plans are so big that you need someone whose sole job is essentially due diplomacy with the federal government, then you know you're making some serious capital allocations. And having that political support at this moment, though, is pretty important optically. Virginia is the data center capital of the country, if not the world, probably. And so I have been seeing data centers popping up my entire life since I was a kid.

But I don't really remember them ever being controversial until recently. And so we actually had a family member with some land that for years, they were going back and forth with the courts to try and win approval for a massive data center to be built on that property. And that deal just fell through recently. So the sentiment changes in AI are creating real obstacles for big tech companies that are manifesting as legal opposition, for example. And so I was looking at a Pew survey on this recently.

and about half of all Americans say they're more nervous about AI than excited about it, while 40% say they're equally excited and concerned, and then only 10% say they're more excited than concerned. So that is not exactly a ringing endorsement of the national popularity of AI. And all of that in a country that is usually more AI or tech first than any other country on the planet. So I think it says something about just the general thought of people on this, matter. And of course, it also comes from the fact that for a long time, AI companies were basically telling you we're coming for your jobs. I think that doesn't help, especially in America. And I recently talked to a member of our mastermind community. And he told me some,

let's say, fascinating stories. He used to work in the White House. And now he basically runs a consulting business where, among other companies, Meadow would go to seek help when it needs connections to politicians for future projects, which is pretty much exactly what's happening right now. And from what I gathered, I think Meadow is not very good at, let's say, understand how Washington works, I definitely hope they will do a better job this time because considering the KAPEX announcements, it would be good if they didn't mess up this project and this new sort of regulation. I think the project that I discussed back then was about a decade ago, Mehta trying to position a stable coin, which didn't work out back then, but has since become

a huge thing. So if they would have just played the cards better, this could have been a huge thing for Mehta very early on. And I just hope this doesn't become sort of a theme for them to mess this up because they have these enormous capital investments right now. And obviously that's the case for most of the hypers. Right now, it's always looking like you suspect that they put even more money into these projects and then they even come out on top of what analysts imagine. So, for example, Meadows' 2026 KepX guidance has been raised multiple times and is now between $130 and $145 billion.

There is no official guidance for 2027 yet, but analysts project that it will be close to $200 billion. an estimate that is also based on Matter's cloud plans, obviously, but there's so much more than just the cloud that I think Zuckerberg basically sees AI and all the opportunities as his third shot, basically, and finally building a platform for Matter and his company. Just quickly so we get the audience on the same page here, Daniel, put you on the spot maybe. How about we just quickly to find what a hyperskiller is and what that means? Well, basically, I use this term, maybe wrongly.

for a very long time, where it just felt like most of the Mac7 companies are hyperscalers. But that's actually not true. Hyperscalers are all the companies that have cloud businesses, right? So obviously, when you talk about companies like Matter, by now, it would be one of them. But before that, it was primarily Amazon, it was Oracle, you know, a company that I didn't necessarily think about it. And then you have Google and, of course, you also have Microsoft. So those are the companies that we talk about when we talk about hyperscalers. It's not the same as the Mac7.

You know, Apple is not a hyperscaler. And video, I mean, I'm not even sure entirely whether they count. into that direction or not, but typically we're talking Amazon, we're talking Google, Microsoft, and by now we're also talking matter. It's one of those terms that you hear so much and seems so important that you're almost embarrassed to ask what it means. So there you go. That's a little 101 on hyperscalers. And we talked before the show going back to your previous point a moment ago, that perhaps it might make sense to quickly give some background on what exactly we mean when we say that meta is on its third attempt to build a

platform. And so younger listeners might not remember this. And it feels funny to say that, but Facebook used to be a desktop-based app in the late 2000s. And back then, it tried to be much more than just a social network. Facebook had third-party apps and games and payments. And if you ever planted crops in Farmville, you were part of Zuckerberg's first attempt to build a platform ecosystem. And I don't know about you, Daniel, but I very much remember Farmville. And actually wonder if anyone still plays that. At the company's IPO in 20, 2012, games and apps were around 20% of Facebook's business. So this was no joke. Yeah, it was quite big back then. I gotta say, I don't remember if I played Farmville.

I think there was a popular farming game at about the same time, which was basically when I was in elementary school, but I think it wasn't Farmville. Probably just a cheap knockoff of Facebook's original game. But anyway, the problem for matter, or back then still Facebook, was that the world ended up moving, as we all know today, to mobile. And Apple started to make the rules in that environment. Apple basically said you can't have a platform within our own platform, which is the app store, of course. So Facebook had to double down on its social network business and obviously advertising to monetize that. And I think in hindsight, you can safely say that this has probably been the best thing that ever happened to matter. But I also believe that Zuckerberg himself was never really happy with that position.

To me, just seems like he's too much of a visionary and a tech guy for, you know, being someone who's happy just running an ad's business for the rest of his life. that at least to some extent depends on Apple's moods and, of course, the app store. So I think I can remember that he openly said that he always admired Microsoft and the platform that they have built. And I think it was in 2014, so two years after the rise of mobile smartphones that basically killed his first platform, that he spent $2 billion on Oculus, which probably most of us will still remember. And obviously, AR and VR are still a big thing today at the company.

And we will talk about them later today. but by far the biggest investment and his attempt on building a platform has been the metaverse, which is obviously also why the company today is not named Facebook anymore, but matter. I think it's pretty good context for understanding how something like the metaverse could even happen. We're in hindsight, there's an absolutely mind-numbing amount of cash burned on something that has yet to pan out, if ever, despite the founder of one of the most successful companies

in the history of capitalism, being so confident in the... the technology that he renamed the company after it. So I sometimes see memes on social media showing these like virtual meetings or boardroom snippets with a caption asking how such a terrible design that looks like a game on the Wii system from the early 2000s, how that could cost close to $100 billion to develop. And I guess the answer said Zuckerberg was desperately trying to build a platform that was going to help cut his dependence on Apple. And with that vision in mind, it does make much more sense to spend that amount of money and maybe rename your entire company. But before you change your name, you would think that you would maybe make sure

that the tech was a little further along and had some real evidence that this is something consumers want to pay for. So it is a bit complicating in the context of meta's massive AI bets today, which, to be fair, they're not alone in. We know Zuckerberg, though, is willing to overspend on things he believes in. And he's desperate to diversify. Meta's core business beyond advertising. Well, and I think at this case, it's not only to create a new platform, but also just because he clearly sees AI spend as a defense mechanism. So he has publicly said that he would much rather invest too much money than just wake up in

a couple of years' time, realizing that he underinvested and get disrupted, which I think is generally a healthy perspective for a company and his CEO to have. And I'm not exactly sure which side I'm on in this case. I mean, on the one hand, I believe meta has one of these. strongest ad engines ever built with network effects that make it nearly impossible to disrupt. But on the other hand, and I know that to take that not too many people share and we discussed it before our call here, I actually buy into the AR glasses story, which of course there are also some caveats, but generally, I do think this could become a sort of platform in the future.

I feel a little betrayed. I thought we were on the same page, you know, Daniel. We were both really tough on Snapchat for their AR glasses. So I have to say, this is a little surprising to me. we were both unified and mocking those things, at least from Snapchat, where they're really a debacle. But something else we should get into, though, now that we're mentioning the core business is that meta just faced lawsuits that threatened exactly this business in its mode. And so for the longest time, meta has been an annuity-like business in which you could count on tens of billions of dollars and advertising cash flow to consistently be coming in. And so that's really the only reason why Zuckerberg has been able to afford spending so much money on all these other things

that he's wanted to bet on. And so if that is threatened, we would need to look even more critically at the commitments meta is currently making. If you say it like that, we might actually want to start there. I would say so just for context, in case you missed it, which was quite difficult to do, there was a lawsuit in New Mexico in 2023, so about three years ago, in which META was accused of basically endangering children. And that case went to trial earlier this year and META was found liable. So it was ordered to pay $375 million. And that was only the first phase of this entire lawsuit debate. So then the second phase came. And the question was basically whether matter had created a so-called public nuisance, which is illegal concept, which was historically

used against polluters and opioid distributors. And just a few weeks ago in August, the judge ruled that it did actually commit this sort of public nuisance, and it found the company or the platform were, quote, a significant contributing cause of the state's teen mental health crisis. And it also ordered META to pay another $570 million in an abatement fund, which is basically a fund that pays for prevention, screening, and treatment of the harms. So the total damages were close to a billion dollars. And I should say that matter is appealing, but this is where we currently stand. And the real problem in here is not the billion dollars in damages, right?

It takes meta less than a week to generate that much in profit, which is absurd to say. But the fact that meta also had to change how its product works in New Mexico and that this obviously opened the floodgates from more lawsuits, that's sort of the bigger story. And meta was actually ordered to hide like counts for users under 18 unless a parent approved otherwise. They were forced to pause notifications sent to minors between 10 p.m. and 7 a.m. and then had to cap minors usage at 90 hours a month, so roughly three hours a day. And the recommendation of the state attorney general was that other states and even other countries should use this as a blueprint whenever they go out against matter. So this was actually just the beginning because of that. Because, you know, the one thing that everyone was actually talking about in the last couple of weeks was the massive Oakland trial, where 29 states went to court against matter.

And the trial was actually expected to run for about six to eight weeks, which would have meant that a verdict would be there sometime in about October. And Zuckerberg, Instagram chief Adam Mossery, and former CEO Cheryl Sandberg, were all expected to testify. But things came a bit differently. I mean, I think back then we still talked about a headline figure for potential fines in this trial that was worth $1.4 trillion. That's trillion, not with a B, billion.

dollars, which is pretty much exactly the market cap that META is trading at today. Yeah, that $1.4 trillion number was great for headlines and for screenshoting, but it never actually was a realistic outcome in the case. As I'm sure you know, if I'm not mistaken, I think this was actually calculated by meta in an attempt to effectively scare people and maybe get the public opinion on their side, since it is not in most people's interest to completely wipe out an American social media platform where it's pretty much assured that a Chinese one is just going to take its place and probably has many of the same mechanics in place as well. Yeah, I think the way the number came up is by basically stacking up all the individual violations.

So part of the case is brought under what is called COPA, C-O-PPA, and that's the Children's Online Privacy Protection Act. And that's basically a federal law that prohibits collecting data on kids under the age of 13 years old without parental consent. And copper carries what is called a civil penalty per violation. So if you treat every under 13 account over the years and you stack up all of them as individual violations, and then you multiply that by the maximum penalty per violations, which is what Mehta did, then you would arrive at this theoretical ceiling of $1.4 trillion.

And as you said, that figure came from Mehta's own legal filings. Nobody involved actually thought, you know, this would be a realistic outcome. I think the amount actually argued in the courtroom was close to $200 billion. And even those $200 billion would have been a pretty massive hit to META, obviously. And although these fines usually don't come at once, they're basically paid over many decades. And historically, U.S. courts have usually awarded around 2% of the stature of maximum, so $1.4 trillion in this case, or 20% of the ask, which is sort of the $200 billion, right? And that's an absolute maximum.

So if META would have lost the case, I personally would have. would have expected payments to be between $20 and $30 billion. But we're talking in the past 10th year because Meadow managed to settle very early on. And this, I would say it really came as a surprise to me. I still remember starting my research and thinking, gosh, when this episode comes out, we'll likely won't know how this turns out. Then only a day later, we had a settlement. So, I don't know, to me it seems like the states knew they didn't really have a chance in court.

So they probably just decided to take the money and settle this way. settlement ended up being less than $18 billion. And that is not shabby by any means, even if it was below what your bottom estimate was for what might have happened in court. And most importantly, there weren't any major changes to how meta needs to operate. It's apps either. And so it's similar to what happened in New Mexico, Instagram basically just goes ahead with hiding likes your teens.

They add in a time cap. And then maybe you have some nighttime and school time blocks. But really nothing major. that's fundamental to the functioning of the business. And they're actually a couple of interesting things when you look into the details of what they came up with. So the first thing is that certain parts of the apps are not included here.

So DMs, for example, you can still, even at night, for example, open DMs. And I think it was a couple of years ago where the Instagram management team was basically saying that a huge part of the growth for the app is coming from the DM section. So I could even see how this sort of turns into an advantage over time because all the other social media apps that don't have this DM

direct message, I should say, section might have to block their apps just like Meta did, but people can still visit Meadow just on the DM section. But that was only one of the interesting facts. The other one is that Mehta only pays $18 billion under two conditions. So the first would be that YouTube and TikTok also agree to implement similar measures as Meadow. And this is sort of why I'm saying, if you don't have a DM function, like YouTube, for example, This would hit you much harder compared to matter. And then the second thing, or the second condition, is that YouTube and TikTok both match

half of the $5.3 billion payment each. So for now, matter only has to pay $12 billion, and that's also over a 10-year time window, I should say, and they manage to sort of pressure their competitors into similar rules, and to some extent, also similar payments. And I think this is quite important because if matter needs to restrict its app for minors, While competitors don't, then META obviously has a competitive disadvantage, right? I mean, this doesn't really matter financially because these teens account only account for about 1% of revenue.

But if today's teens don't use META's apps, then, you know, the 20 and 30 years of the next decade might not use them either, or at least not to the same standard. I think the biggest advantage of the settlement is obviously that a lot of uncertainty that could have been there for years, basically, is now more or less resolved. because even if the trial would have been over after six weeks, if META had been found guilty or liable, there would have been many more lawsuits over the next couple of years where the chances for META winning would have been significantly worse.

In fact, there likely will still be many more lawsuits anyway. I mean, META is still facing hundreds of pending lawsuits from individuals and from families and even school districts and others, but I do believe that, you know, setting this precedent of settling instead of losing in court is a good one. All that said, I could still imagine, you know, I live in the EU. And knowing the EU, I would be surprised if there are more lawsuits coming from here because it seems like it has become a business model of just suing the big tech in the US

to get back what you don't get in tax revenue. But again, even if I assume that they will end up with a lot more lawsuits and perhaps something like $2 billion in annual costs for these lawsuits over the next decade, I think it's more or less negligible if, on the other hand, the fee of further regulation that actually goes into the algorithm is gone. Let's take a quick break and hear from today's sponsors. For most of my 20s, my money story was simple. Earn more and the rest takes care of itself.

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check it out at plus 500.com. Trading and futures involves risks of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus. Every week we analyze companies on this show and ask the same question. Is management actually running this business efficiently? Here's the honest answer for most companies right now.

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discover how AI could reshape work across your entire organization and how to position your business to prosper from it. I use this, and you should too. If your revenues are at least in the seven figures, get our free business guide aligning for the agenic era, how AI is changing everyday work at net suite.com slash t-ip. The guide is free to you at net suite.com slash t-ip. NetSuite.com All right. Back to the show. I think it's really interesting to think about the competitive dynamics here, because on the one hand, you could probably argue that for meta to be restricted and its ability to target and resonate with the next generation of users, that would be a competitive disadvantage. On the flip side, though, and this seems hard to imagine with meta, but if they're the only ones

with these really strict enforcements, then they get to wear this veil of, hey, we are pioneering child protection on the internet. And that could actually be a tremendous rebranding opportunity for them to earn back credibility and basically make all their competitors look bad. So I don't know, there's different ways to look at how this will all unfold. And for me in the past, I have actually opted not to personally invest in meta because I felt like the impact they've had on society has been particularly damaging. And they really have pioneered many of the worst tactics that we've seen be adopted by other social media companies. I also recognize that that can be a really costly perspective to have as an investor

in terms of missing out on great returns. So I would say I could probably get more comfortable with an investment in meta if the price was right. And I felt good about these new protections being put in place. But I definitely come with my own biases. And personally, I'm pretty happy to see these rulings go into effect. but I'm also skeptical that kids will find a way around them. And if not, they'll find other platforms to use.

And so it's probably as good of a time as ever to launch a social media app targeting folks under 18 or to be a Chinese competitor that can come in and try and grab market share for social media in the U.S. And I remember when TikTok was banned, for example, overnight, it seemed like everyone immediately downloaded an app called Little Red Book that I'm not even sure. I don't even think like half the app was in English or barely. any of it was in English. People were downloading it and using it and was the number one on the app store for like a week because it was scratching the itch of TikTok while TikTok was gone.

So what's your take, though, on these rulings? Yeah, first I've got to say, I've never heard of that app. So that has just gone completely by me. Also, TikTok was never not allowed here. So maybe that's why. But yeah, I think it's difficult. I've certainly seen takes online that I disagree with. So for example, some people say that meta was being sued for basically being too addictive. And I think that's a misframing of what actually happened in my opinion. Obviously, if that were the case, you could argue that many things are too addictive. I mean, should video games be illegal if they keep kids on the screen for four hours, maybe movies or even books? I mean, for example, I just thought about the app or the game Roblox, which I think is the number one thing

for young people nowadays to play. And I've heard that the average time they play it per day is three hours. That's the average. So you'll probably have a lot more, you know, young kids that play that game for many more hours. Then you have to think about how would you regulate that? So I don't believe Meadow was sued for being too addictive. I think it was sued for the intentional design of products to induce what you could probably call compulsive or addictive behavior in kids and teens. And I think the difference here is that it's about strategically focusing on young people

and exploiting their weaknesses, then hiding that this is even happening. And I think that's different than, for example, a good movie or a good game. that ties you to the screen for a couple of hours, or saying that, you know, something is clearly designed for kids in the first place because at that point, you know, they are subject to special regulation,

which matter has not been, although you could argue they tailor the product for kids and young teens. And of course, this would also mean that, you know, YouTube shorts would need to face similar lawsuits and maybe just YouTube as a whole, which is again, as you said, what matter is kind of now saying out publicly.

They had this sort of open letter to TikTok and YouTube, portraying themselves as you know the white knight standing there protecting kids and that these competitors are not doing that and of course there's something to it i think most social media has these problems which is also why i'm not biased against matter maybe in the same way that you are because i told you earlier i personally probably spent much more time on youtube so to me what's more addictive is youtube shots when i compare that to for example instagram and i also think and this might be an unpopular take or opinion that many parents who grew up without using a smartphone or social media for that sake simply a bit over their heads when it comes to knowing

how to control their kids' usage, but also sort of understand why they would need to do that in the first place. I mean, looking at the New Mexico case, where they basically decided to pause push notifications, two miners between, as you said, 10 p.m. and 7 a.m. and to kept minus usage ad, I think was 90 hours a month. That's all stuff that I believe parents should be able to control by themselves. But obviously, that also doesn't change to the fact that there is a problem with how matter build its products for kids. And that's why they got sued. There's definitely a kind of fundamental question about the relationship people want to have with the government here and what types of things you want to be regulated and what falls to

personal autonomy and parenting and what should fall to government or large corporations. to dictate. And I don't know if we want to get into all that, but I would say generally, even though this trial quickly ended with a settlement and should give META some breathing room in the future for some of these pressures, I think META will continue to have problems with trials as most MAG7 companies have and will. But since META's business is more concentrated than Google's, Apple's, or Microsofts, it will always be a bigger problem for META. And as soon as something could threaten their ad algorithm, that really makes it an existential question for meta and their existence, which is why Zuckerberg can't let go of the platform idea we've

talked about today and expanding his business beyond advertising, even though advertising has done him very well. So let's get back to Zuckerberg's AI vision for meta, because I think it's pretty unique compared to some of the other hyperscalers and how it could change the company's future. And so a year ago, Meta's AI story was really just centered on its LLM LAMA. Today, though, it seems it's taken on a life of its own, and there are many more layers to this vision now. Yeah, I think by now there are many use cases for AI that Zuckerberg continues to talk about. And I think it's actually part of the communications problem for matter.

I think the market is just not buying the entire story. And that's primarily because of what we talked about in the beginning, which is that Zuckerberg has this major vision of becoming a platform that simply hasn't worked out a single time that he tried doing it. And in fact, there wasn't a single self-created product after Facebook, if you actually think about it, that Zuckerberg has successfully built and then also shipped to a larger audience. And I got to say, he did some great acquisitions. So, for example, if you look at Instagram, that might be one of the best acquisitions in corporate history. Perhaps after YouTube, I'm open for that argument. But you basically bought an app for less than a billion dollars.

was about 700 million back then because the stock priced after their announcement sort of dropped. And now you could make an argument that this app alone is worth about $100 billion. So you have a CEO that, in my opinion, also gets a bit too much of a bad reputation right now or whenever things are not going that well for Meadow. But still, if we talk about AI CapEx, I'm not sure if you remember, but there was a brief moment where Meadow was the only Max7 company that already saw a tangible AI monetization. It was about the time that we covered the company for the first times. It was early this year.

And the stock back then traded about $700 per share. So AI was improving the ad algorithm, just as you said. And then what you can look at, which is quite a good metric, is you look both at ad impressions as well as ad prices. And whenever those go up at the same time, you know their business is going quite well. And that's exactly what you saw in Q1 of this year. Yeah, we covered that dynamic in our first episode on meta, which we'll have. linked to in the show notes for anybody who wants to go back and listen, but meta does not set ad prices. Ads are sold in an auction. So the price is whatever advertisers bid. And so that means

price and volume are connected like supply and demand. When meta opens up a lot of new ad inventory, for example, through a new format like stories back in 2018 or adding reels in 2022, supply of ad inventory jumps and then auctions become a little less competitive and then the average price per ad falls. It's just a supply and demand basic story there. And that always looks scary when it happens in the quarterly numbers, but it's actually usually a bullish moment in this cycle because this cheaper inventory attracts more advertisers than the targeting improves over time as meta works on its underlying algorithms. And then you see the bids rise, you know, what advertisers are willing to pay increase.

and then a few quarters later, you have both impressions and pricing growing at the same time. And that creates really an incredible twin engine for growth. And so the scarier version actually is the opposite where you have impressions stalling out and price increases alone carrying revenue. That's really not something we talked about before. Pricing power is a great thing to have. But any business that relies too much on just raising prices to drive earnings growth, that can become problematic over time.

and it's the same in advertising, effectively means that the auction is being squeezed rather than expanded. And that hampers their earnings power longer term. There's a slight catch to that, though, which I think is worth mentioning. So the two most important factors, as we talked about, are add impressions and also add prices. In the best case, as you said, both of them grow simultaneously. But due to the auction dynamic that you just described, that's not often the case. There are two ways, though, that add impressions can grow. So either, Instagram is simply showing you more ads. So for an example, let's say you spend 20 minutes on the platform and then you go through, let's say, 20 posts and you get four ads

shown on those 20 posts. That could be increased to five ads rate. The other way for impression growth is when users spend more time on the app. So if you spend 30 minutes instead of 20 minutes and you go through 30 posts instead of 20, you might be shown ads at the similar frequency, but instead of just being shown five ads, you're now being shown seven ads. So that's the other way. And according to Meadow, time spent on Instagram and Facebook grew about 10% in Q1 and Q2 of this year. So that was the major reason for impression growth. In theory, that is more sustainable growth. Since the general assumption is that you don't want to shove down even more ads into a user's feed,

although we will still talk about how meta managed to actually increase ad loads without anyone being annoyed and how they might eventually end up turning every pixel into an ad through the use of AI, which is sort of an incredible thing to consider. And I know that you talk about visiting Instagram only. You like to go there and actually use it as a way for almost product discovery. You like to see the ads there to help you find new stuff. So you could probably speak to that. Yeah. That's actually true. And I'm not quite sure what that says about me. But I actually just booked a golf session for my family. And I got the idea and the offer through an Instagram ad. I got to say that. So I don't know. I think it's just generally astonishing how Meadow turned

ads into content to some extent. I mean, ads used to be these highly annoying banners that only cover, let's say, like 5% of the, you know, online screen or maybe videos that you couldn't click away. But it was always something that you wanted to avoid, right? You wanted to prevent seeing ads. Now, Mehta's ads take up the entire screen, basically. if you're going on reels, for example. And nobody's really bothered by that. It sort of feels like ads have just become a part of the content. And of course, it helps that, for example, influencers who create most of the content on these

platforms are constantly posting ads too. So the line between what is actually content and what are ads is just increasingly blurred. So that helps. But anyway, back to the pricing dynamics, because there's one more thing that I wanted to add, the healthier way to increase ad impressions is obviously to spend more time on matters apps. But the other way to increase ad revenue is to play with the pricing. And here again, it might seem like higher prices are generally a negative thing or, you know, perhaps a less sustainable way to grow. But that's only the case because you would say, well, matters,

advertisers are return driven. So they're not brand advertisers. They don't pay just to, you know, get into more eyeballs for them. It's important to make a profit on their ads immediately. So just an example, if they spend $1,000, they want to, you know, they want to. make, you know, let's say one and a half thousand dollars. So this would be a 50% return on the price that they paid or basically the ads that they had. And if ad prices go up, you would think that return goes down. But that doesn't necessarily has to be true. So prices going up is only bad if everything else is equal. So if the ad isn't getting more targeted and isn't getting more effective, then you don't want to pay a higher price for the ad. But if the ads become more

effective. And increase in ad prices doesn't have to reduce the return on ad spend. So again, for example, if the cost per lead goes from a dollar to, let's say, a dollar in 10 cents, but the lead spends on average 10% more on the advertised product, then nothing actually changes. And AHA model has actually helped to make meta's ads more effective. They have systems called Endromeda, Jim, and lattice. And those are the models that rank and target to find the best ads for every user, they're also the ones that rebuilt meta's ad targeting after Apple's privacy changes some years ago. And since AI improves their probabilistic prediction abilities, meta was able to drive up both prices and impressions in Q1 of this year. And unfortunately, though, we don't

see that trend continuing into Q2. Yeah, I think that's actually a big part of meta story. So what I like to do is try to ignore the headlines and sort of the obvious reasons for why stock is down. And just try to figure out what else could also cause it. So I'm sort of assuming here that the market is actually smarter than we as value investors sometimes give it credit for and kind of knows something that I would miss just by looking at, let's say, the front page of the New York Times. Because if I do that, the lawsuits seem to be the reason for, you know, why this stock is out and potentially also the Kappex, which, you know, the sentiment about that changes every single

time or every single week in the market. But I think there's something else. Because again, I think META reached $700 per share earlier this year, even though everyone knew that KPEX would likely be higher than expected. And I think what changed was the AI ad algorithm narrative. So as you said, in Q1, it looked like META was the only company with an actual, real, tangible payout. So you have this $200 billion ads business, and apparently AI makes it much more efficient. That was the narrative.

But that narrative, as you just said, was a bit harder to support in Q2, where ad banks, pricing has driven much of the growth and impressions in the most important markets actually lacked. So worldwide, if we look at the numbers, impressions actually grew 14% and prices grew 12%, which looks pretty good. However, if you split that up our region, the US and Canada saw only 9% growth in impressions and prices jumped 20%. And then in Asia, impressions were up 17% and prices were up just 1%. So I know that's a lot of numbers, but to me, that discrepancy, suggests that pricing growth in the US is likely not going to be because the ads are actually becoming more effective, but rather that matter is sort of reducing advertisers return, sort of the

dynamic that we just discussed. Otherwise, I think why wouldn't prices also grow faster in Asia, assuming that there are no changes to the ad algorithms or the regulation in just one geography, I didn't hear any of that. So I have to assume that matter's sort of turning the dial in North America to get growth there right now. And we should also say that this is not the most sustainable way to grow, as we've mentioned. It's generally an advantage, though, that meta can turn these dials when they need to, right? When organic growth is a little bit slower, which can perhaps be simply due to just economic cyclicality, the ad load dial can be turned.

And for a quarter, you get an additional ad shown and voila, you're back to 20% plus growth again. And many companies would love to have a dial like that that they can tap into so easily at their disposal and going to another topic, how about we discuss WhatsApp? And last time we talked about the vision for AI agents within WhatsApp as being this prolific business opportunity where the agents could help small businesses all over the world become much more efficient. And it's because a lot of folks communicate with businesses over WhatsApp in different parts of the world, which is sort of a foreign concept to me here in the U.S. But I've certainly learned to understand to understand

understand how different people use WhatsApp. And this seems to be sort of the preferred way to monetize WhatsApp is by doing some sort of B2B service as opposed to advertising. Yes. And I think I've become more bullish on WhatsApp's outlook because just as you said, the entire concept last time was a bit foreign to me. I used WhatsApp a lot, but I never use it to talk to businesses. So it was sort of difficult for me to understand this sort of monetization layer because despite again being a WhatsApp power user, if that even exists, there are very few business accounts here in Germany. And I think last time I talked about that there's just a cultural difference

where I wouldn't want any business account between my personal messages. And I just couldn't imagine how that works out. But I don't know. I mean, it's just not popular to use him. And I think many American analysts or investors just look at the overall user number of WhatsApp because they don't use the app at all. And then assume you can scale the success of some countries to all others. And because of my experience, I'm just not sure whether you can actually do that.

That said, though, I think WhatsApp has been very successful in India and some other Southeast Asian countries. And Zuckerberg has actually pointed out in an interview, and I found it quite astonishing, that Thailand and Vietnam rank about sixth and seventh among matters countries by revenue while by GDP. They are somewhere in the 30s range. So the reason is that business messaging apparently is a huge part in those countries and And something like 2% of Thailand's GDP flows through commerce on matters messaging apps, which

is just an insane fact to me. And in those markets, businesses basically run their entire sales and customer service through chat, which could be WhatsApp, but it could also be Facebook. And it works there. And that's something that we discussed last time. Labor is cheap enough to have actual humans answering the messages all day. That's where AI agents can potentially help remove some of the frictions that make the economics work better in countries like Germany and the rest of Europe and maybe the U.S.,

even though there is a much smaller user base in the U.S. And so the plan would be to give every one of those 100 million small and medium businesses that already work with meta, give them an AI agent that handles sales and support questions. And the way this would be monetized is likely through a cut of the incremental conversions that they're able to drive. And so the advantage of expanding into developed markets obviously is that there's higher Arpus. The average of revenue per user is much higher because median incomes in those countries are much higher. And so even at a lower level of penetration,

meta could make the same amount of money or more in the U.S. or Europe as it does in emerging markets where there's certainly much more usage of WhatsApp in this way. Zuckerberg also personally gave an update in the latest earnings call on the progress of WhatsApp and sort of its future importance to meta. And I think the best thing that we can do is just listen to what he said. I'm also very excited about our progress with business agents. We made meta business agents available globally this quarter on WhatsApp and Messenger. And there are already more than one million businesses using them to talk to their customers

or complete sales every week. We're rolling business agents out on Instagram now too. One interesting thing about having an agent talk to your customers every day is that it learns over time and can bring all of those insights back to you. So we're building more agentic capabilities to summarize all these conversations, digest what happened overnight, and surface what customers are asking for. And soon it'll go further, including suggesting ways to grow your business, giving you competitive intelligence and real-time insights into what's working and what's not. And over time, we'd like to build this into a business in a box. service that can help you start and run a whole business using Meta's platforms. And just for the sake of completeness,

meta is also integrating ads into WhatsApp, but only in the status feature. And while Mehta claims that the status feature has about 1.5 billion users, I think it's definitely not a big thing here in Germany. And I think it's also a trend where mostly old people are using it. And I don't want to put an age range on it, but probably people over the age of 50. So the majority of ad revenue there is once again coming from lower up your markets, or at least the sort of people that don't use the app too often. Let's take a quick break and hear from today's sponsors.

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If your revenues are at least in the seven figures, get our free business guide, aligning for the agenic era, how AI is changing everyday work at netsuite.com slash TIP. The guide is free to you at net suite.com slash TIP. NetSuite.com slash TIP. All right, back to the show. I think this goes back to an earlier point that Zuckerberg is sort of bored by the ads business personally. And then he wants to get more involved in its users' lives, as well as the enterprise business world. And if that's what it takes, and this is what they have to do, because you wouldn't, need to spend $150 billion on CAPEX for simply improving ad algorithms with AI, right? Meta could likely spend 20% of that and remain this incredible cash printing machine

with actually improving economics on their advertising business and then maybe the stock could trade at double today's prices. That's the way Apple has approached things without exactly wanting to bet big on investing in LLMs. But the reason meta needs is CAPEX is for. Zuckerberg's personal superintelligence idea, if we want to call it that. And so he envisions everyone having a continuous, personalized AI assistant that understands their specific goals, health, relationships, career, and finances. But that level of AI would also give him the opportunity

to play in the enterprise space, which is why the entire cloud business debate came up in the first place. There's a pretty interesting article that Zuckerberg wrote, and I linked to it in the show notes. So everybody who is just interested in how he thinks about it should likely check that out. And I think one of the most important things for this vision is basically the new model, the new LLM that meta has built, and that is called MewSpark. And they have no chance of expanding into the enterprise space if they can't offer what is a frontier model or at least one that is almost as good as the frontier models. And that's just because you need a suit of AI power tools that sort of support the cloud.

But it's not only about the enterprise space, right? you have super intelligence as basically this personal assistant, and you also need the right hardware to do that because Zuckerberg thinks of these agents, as you just mentioned as something, basically, that understands you very well and that can help you on a highly personalized level with everything that you do.

And as we talked about in last episodes, it seems that the most important thing by now for LLMs is the harness that is working in. So basically the context that you give it. So if you control the hardware plus the LLM, that's incredibly valuable. to a company. And what better hardware for, you know, that vision, then I'll actually let you take a guess what it could be. Oh, boy. I think we're back to talking glasses, huh?

We are back to talking glasses. That's right. And, you know, I recently listened to the Sam Altman interview on David Zeneres show, and I think I talked to you about it. And he basically said that he expected AI to have a much larger impact by now than it actually had. And he said that GPT4 was already capable of basically replacing most SaaS companies, but that, you know, inertia was just too strong. And there wasn't really this iPhone moment yet that AI needs. And the last part is sort of of why I bring it up here, because I think that Zuckerberg believes that AR glasses are the iPhone moment for personalized AI. And while I would definitely not classify myself as a visionary, I just can't shake the feeling that he might be eventually right with that sort of vision in his head.

I do think glasses are the best fit for at least everyday hardware, at least if the product is worth out and obviously that could take a long time. That said, I believe we discussed this last time. I could totally see a future in which Meadow is spending tens, even hundreds of billions of dollars on that vision. And then in 10 years time, when the technology might actually be there, Apple, for example, takes over and does what it does best, which is to build hardware for consumers. And I think that matter has some powerful patents.

We talked about this before the call. For example, they have this wristband that we also talked about when we first covered matter. So if you want to understand how it works, I would advise you to go back to that episode after listening to this. And basically, to give you a summary, Apple's Vision Pro works with cameras at the bottom that basically track your hands. So that's not a great solution because as soon as it is dark or you might just have your hands in your pockets, you basically can't use the Vision Pro anymore. With META's wristband, you are controlling the glasses much easier, and the glasses don't need to see your hands all the time. So this is by many experts considered to be the way to go for AR glasses, and META has a pattern

on that. It's not just something that any other company could copy. I think this is more or less just Apple being Apple, right? The iPod was not the first MP3 player. The iPhone was not the first smartphone. The Apple Watch was not the first smartwatch. and AirPods were certainly not the first wireless earbuds. And so Apple has never really once pioneered a category, right? Their entire playbook is to let others prove the market exists,

let them make the early mistakes, and then show up years later with the polished version and the strongest brand and consumer tech. So that's why it was so interesting that they really did try to pioneer the category with these Vision Pro goggles. And so right now, the interesting dynamic is that Apple is taking the exact opposite approach to meta. They're not spending anywhere near as much on AI as meta or any of the other tech giants. And they stopped any of their plans for AR or VR glasses. The Vision Pro was a flop, unfortunately. And almost as if they gave it a try and sort of figured it out, you know, hey, no, the world is not there yet with these glasses. Let's let other people figure out AR and VR. And it's quite interesting because

is, you know, the two of us, we talked about this vision with Snapchat and then also the first time with Matter. And one thing that we just don't know and we have to figure out over time is what exactly and who exactly are the glasses for, right? I mean, you, for example, you don't see yourself wearing any glasses. I wear them, you know, since I was born, basically, so I could certainly see myself wear glasses. But then the question is, what could the glasses do that you can't do easier just using your iPhone, right? I think it's sort of about the incremental value that these glasses can give to you. And that's something that you still have to figure out. I mean, I could change a lot of things. But there's certainly a debate about who actually needs these glasses.

And obviously, you know, people are into tech. They just like the idea of that existing. But is there actually a mass market where you can actually, you know, sell this to a billion people or more? That's still to figure out. But I would say on a positive note, it could also be that Apple is wrong. And glasses will be the next generation of hardware. And the technology advancement that matter is making today will give them enough of the lead to win. over that category. And I initially thought that matter might have a hard time dominating this hardware because they can't offer a larger ecosystem with it. For example, I mean, Google Android's XR glasses would launch with an entire app store and, you know, the whole Google ecosystem

behind them. So you're talking Google Maps in your field of view, you're talking Gmail, Gemini, all that sort of stuff. But I don't think that matter would even need that. I'm also quite unsure whether you need that in AR glasses anyway. I think in VR, that's very helpful. But in an AR experience, you don't want to go through apps anyway. I think there are only a couple of very important features that you want integrated into your AR glasses. And I think META can create all of those. And I think they just need to work without opening an app. I mean, if I just think about opening an app in my eyesight and it just takes, you know, half a second, I think that would be way too long. So it has to be a smooth experience that doesn't rip you

out of what you're currently doing. Another problem that I think very much only got bigger. for meta's a reputation. And we worried last time that consumers might just not trust meta enough to want to put their glasses on their noses. And after all the lawsuits and bad publicity that meta has seen basically really every couple of years, even after the rebrand, it feels all the more likely for this to be a valid concerned. And beyond that, when I think about what a platform does, it does strike me as sort of

being the complete opposite of what meta is good at. A platform features third parties and takes a toll. So an advertising business's job is to fill the screen with content, capture the user's content, and sell it. So I do wonder, you sound quite bullish on the combination of AI and glasses for meta, and maybe now not so much anymore. So I'm curious about that. And I have to admit, I have wanted to personally try out the meta ray bands glasses, at least.

Oh, wow. So maybe we'll actually see you with glasses in 10 years' time that are, meta-branded. But to your point, I mean, I go back and forth on it, I think my vision for why they could work is just a bit different. So, for example, what if AI doesn't give Zuckerberg his platform that he so desperately wants, but instead it just sort of transforms the ad business into something that is even greater than it is today. And it wouldn't be the first time that Zuckerberg is sort of forced into his luck. And I don't know, let's say you see a photo, for example, you know, could be an influencer, could be a friend or whoever, and there's a sweater in that

photo that you like. Now, today, that sweater is just part of the photo, but it basically generates no revenue for matter, obviously. Now, imagine you can just ask the AI right there in the app where that sweater's from. And it doesn't just tell you, it also, you know, links to the shop, and if you want it, you can just buy it, it's two tabs, cost you a couple of seconds. And then the seller basically pays matter for the conversion to that product. And potentially, brand, just generally pay Mehta for the right and the option to be named and come up in these at least AI generated photos where Mehta has the right to own the content. I'm sure there are many ways to monetize that, but the point is that sweater was never uploaded as an ad, so nobody

attacked it. There was no advertiser paying, you know, anyone in influencer, for example, for a placement, but still AI sort of turned this into ad space. And I think that would turn pretty much every object in every photo and in every video on the platform into potential ad inventory. And that's arguably the last step to just completely blur the line between content and ads that we discussed earlier. And that doesn't only apply to AI generated content, right? I mean, this basically would apply to every single photo that's posted. Yeah, there's probably more of a problem with like the rights and everything, but that can

be figured out. And potentially, and that goes back to the glasses, I could see that also sort of be, you know, a product for the meta glasses. Everything you see in real life is technically only one ask and a click away from becoming a product to some extent. And I know this sounds quite stopian. We talked about it before, but I think it's more of a question of how do you do it, whether should you do it in general?

And I think Zuckerberg always talks about that, you know, the most important thing for the glasses is that they are good glasses first and that they don't seem intrusive in daily life. And that's very much the point here. And I don't know. I would love to have a feature like. that. Of course, only for like five to 10% of the day, but the rest of the time, I don't want any buttons spammed into my little eyesight. And we could argue that maybe the incentive of a, you know, ad platform is not perfect to push out these glasses. It just feels very black mirror

adjacent. I think there's an argument to make. And you mentioned it earlier when we were chatting that the iPhone is perfect because even if you use it 10 hours a day, you can just put it away. And it feels, in the best case, like a very conscious decision to pull it out and go on Instagram. And glasses are different, though, right? There are two billion people in the world who wear them every day. And you said yourself that the first thing you do in the morning is reach your glasses. And the last thing you do in the evening is take them off. And so it's sort of a personal space that might just not be made for a product like AR glasses.

They don't want ads being literally shoved into your face as you're laying in bed at night. And one good point that you made at some point, which is so sucking in my head, is that out of those two billion people that wear glasses, obviously a lot of them are prescription glasses and some of them are quite complex. So you also got to ask yourself, who's the customer? Like, there are people who just don't want to wear glasses at all, so they're not your customer. Then out of those two billion people who are potential customers, a lot of them were just not able to wear those glasses because of the prescription. So obviously, that's just, you know, a matter of time to figure it out. But that's sort of the point. If you spend tens of billions of dollars on it and I just can't see it happening in the next

10 or 20 years, that's sort of a problem. And obviously, I don't want to go back to the lawsuits, but the big difference between Meadow and other big tech is the fact that they are an ad company, right? And every advertises most important incentive or currency is engagement. And that's why, you know, Algos feed you a lot of negative stuff. And that's why every meta product focus on consumers comes with at least some sort of questionable incentives. And if we just forget about the glasses and sort of go back to the idea that AI can turn every pixel of your screen into an ad, I think that makes me quite excited as a

shareholder. The feed was more or less saturated years ago. Then you had stories and that's also to some extent saturated. And then obviously wheels were coming but also maturing to some extent. And those new AI ads, and I think that's important to understand, they would not only be new inventory for matter. There would be a huge jump because it's basically infinite content. And at talked about it before. If you think that ads is a good business to be in, and there's more and more of that in the future, you sort of want to own the aggregator of that, right? It's similar to the Uber argument. If you think AVs will become a bigger and bigger thing, but it's commoditized, what you want to own is the aggregator of AVs. And I sort of think about this in the same way.

So the most bullish thing about this is that there's an immediate payoff from AI in what matter is doing best, and that still is ads. And you don't need superintelligence or the next computing platform or cloud business and all of that, it's just better algos and more inventory and that would technically be enough. Overall, it's like super promising, of course, but when we're talking about the supply and demand of ads and how that balances toward the price that comes out at auction, if we have the biggest jump ever that you said basically infinite in the supply of ad inventory, I don't know what that does to prices and how that ultimately affects meta's business. I mean, I think on net, it is, of course, a good thing.

And it won't actually be an infinite increase. But still, it's sort of an interesting question to think through of how such a dramatic increase in ad inventory could work against them by really imbalancing supply and demand. So let's get to exactly talking about these broader visions of what META wants to do with AI and the CAPEX. It's going to be involved in that. And as you said, CAPEX for this year, will. be $130 to $145 billion, maybe as much as $200 billion next year.

And I think what the market is currently scared of is that meta is trying to justify its AI spend through the platform vision we discussed, but also through Zuckerberg's enterprise vision, meaning meuse spark, superintelligence, and gigawatt clusters, which are just mega data centers, basically. All of that is unproven. And given meta's track record on expanding outside ads, I would say it's highly uncertain how these will work out. And so in the latest earnings call, Zuckerberg said this one, asked about the enterprise vision. I think that the enterprise opportunity is kind of the sum

of all of these different things. It's not just the selling compute. Also, the API services, the productivity services, the kind of business agents for other parts of the business beyond marketing are all parts of the overall offering. And I think that there's just a very, very large opportunity there. So we're quite focused on that. That's going to be somewhat of a new muscle that we build as a company, but I think it's a very important one that we build so that way we can make sure that we can maximize the opportunity ahead of us. I think the problem with this is that Zuckerberg has never proved to really be a good go-to-market guy or somebody who knows how to build products that people want. Besides initially what he did with Facebook, and when he is

now giving such a vague answer that basically includes everything you can imagine to try and justify hundreds of billions of dollars in capital expenditures. I just don't find that to be a satisfactory answer. That's also what the market thinks. And I think if Zuckerberg just wanted the stock to early, as you said earlier, he would just cut, you know, cabex in half and frame matter as this advertising beast that it certainly is. And I think that would be a much better story to tell about using AI for ads, which again, we know they can do that. And in fact, for the longest time, Zuckerberg argued against META having a cloud business, saying that the marginal return on a GPU has always been higher when using it internally for META's own products than renting it out

to a third party, basically. So the question now is, what changed about this? Because we all heard about, you know, them potentially selling computer. And I guess there are two ways to look at that. And the first and probably also more bearish take is that Zuckerberg just decided. that winning AI is so existential that he spends first and then asks Westerns later, which I think you could argue this is exactly what happened. And also you have to figure out how to monetize later. And this would fit his argument that, you know, he would rather overspend than wake up being disrupted. And this narrative would also mean that selling access compute is sort of more of a margin

of safety scenario than an actual cloud business plan. And the other option would be that it's sort of a more long-term plan for matter to turn into an enterprise company. But, and I think this should be mentioned, this would take more than just some access compute, right? To compete with Google, to compete with Amazon, Microsoft, all of those companies, the hyperscalers, as we've now learned, matter would need an ecosystem that makes it attractive to choose it over all the other cloud providers. You can also say that meta needs to defend and justify all the CAPEX to the market. And then if their bigger vision is years off, they've got to be able to do something today to provide some returns on capital,

hence the moves to selling compute as a cloud service. But let me ask you, I mean, what would the enterprise system actually look like? Selling excess compute might work in this environment because you have this massive imbalance between demand outweighing supply, but that is more of a short-term reality. With everyone in their mother building a data center right now, it seems pretty likely that in two years from now, or whatever the timeline is, we'll be talking about how there's so much more supply than demand, and things will flip the other way. Which is why you need to build a natural ecosystem right now. And I think the chips and the data centers are sort of the bottom of the enterprise stack.

And then these LLM models, so for example, Mew Spark right now, they would be the developer layer. This is where they, you know, spin off new apps. And basically, if you follow matter, they will talk about new apps all the time and how easy it has become through AI to get these new developments out there and to give it to coders and all of that. That's why I said you need a frontier model to even compete with any of the other clouds. And that's where you built the tools. And then on top of all that, you also need a sales force and support contacts and so on. And in the era of AI, the fastest way to pull customers up to that stack has been the model, right? This is basically what we've seen in the last one or two years.

I think there's an argument to make that by now, people sort of know that this is a more commoditized play. So it is not a huge benefit anymore to be sort of in talks or, business with Anthropic or OpenAI. I mean, Microsoft benefited a lot early on from being, you know, using Open AIS models. And then Google Cloud is currently exploding due to Gemini. You see that in the earnings. Then Amazon is partnered with Anthropic. And Meta is sort of the only company that is not partnered with Open AI or Anthropic,

which, to be completely honest, might even be an advantage by now. I think there's no circular financing. There are no stakes in trillion-dollar companies that never earned a dime of cash flow. I think currently how the market thinks about it, this might even be a positive. And of course, it's also a difference in where the strength of the model that you have lie. So, for example, Mew Spark is supposed to be quite good at orchestrating agents, which is not too surprising given, you know, the entire super intelligence and the sort of personalized agents' vision that Mark Zuckerberg has.

And they're also quite good in, you know, creating pictures, which is something that we talked about earlier. If you have hundreds of millions of small businesses, if you can just, you know, build an LLM that is supporting them at, for example, creating ad campaigns. That's a huge thing. But MewSpark is not necessarily good or strong in coding, at least compared to other frontier models, which, of course, is especially important for the cloud

and, you know, the tool-building parts. And to be fair, matter brings more to this, and some people assume, I mean, there are features that I don't understand, but, you know, some of the software engineers in our mastermind group have talked to me about it. PyTorog, for example, is sort of the framework that basically the entire AI world builds on, which goes from, you know, startups to research labs.

And that was also created by Matter. And I think by now it's in a partnership with Linux, if I'm not completely mistaken. So they already own a piece of the developer layer that even companies like Amazon don't own. And they also have their own custom AI chips. And just the fact that they operate on one of the largest computing fleets on the planet for their own apps. So you could at least entertain the idea, you know, of all of this and the vision working out. What doesn't exist are the enterprise connections. Meta has no sales force, no support organization, no compliance track record. And that stuff really can take a long time to build. Google,

with all of its engineering brilliance, needed more than a decade and tens of billions of dollars and losses before Google Cloud was something that was really even taken seriously and turned profitable. Which is to some extent why I think that if the enterprise vision works at all, I would expect that sort of the entry point would be not the Fortune 500, but maybe the hundreds of millions of small businesses that I mentioned earlier that already live and sort of exist and make business on WhatsApp and Instagram. I think that's a very much meta way to introduce itself to the enterprise world. And I know it's questionable if that will ever work. And if it does, it's almost certainly something that takes you five to 10 years. But at least then you have a vision for where

all that Cappex is supposed to go. Well, it's so scary about this Cappex cycle. Is it. just seems like there's no way back. We've gone off the cliff. When meta failed with the Metaverse, Zuckerberg could just say, 2023 would be the year of efficiency. They cut costs, and they could account for and make up for some of these losses and relatively return to normal. That is just not the case with the hyperscalist. Should they give in the order of magnitude of liabilities that they're incurring to develop this technology? I recently gave a presentation to members of our mastermind community, which you can find a link to apply for in our show notes below, where I talked about the MAG7 funding these data center buildouts. And I have to admit,

seeing the numbers really makes you pause. Alphabet, for example, has about a trillion dollars in off-balance sheet liabilities alone through leases that haven't started yet and from purchase commitments for things like energy to power those data centers. And this was all coming from a Wall Street Journal reporting deep dive into the topic. And META itself is close to $700 billion, which is not so modest. And compared to a year ago, those liabilities have grown about 800% for both companies. And so a good example of how this financing works is with META's mega data center in Louisiana. The cost for that data center alone will be tens of billions of dollars.

But instead of putting it on meta's balance sheet, its financier was called a special purpose vehicle or SPV. And so it's a fairly complicated concept. And in plain English, meta and some sort of financing partner will set up a separate company whose only job is to own this one data center. And so the partner in this case is actually a company we covered way back when on the podcast Blue Al, they're sort of a private equity and private credit giant. And they're holding the majority of the equity in this SPV.

and then META keeps a minority stake. So the reported split is something like 80-20. And that separate company, this SPV, then borrows the financing for the construction itself. So roughly $27 billion of bonds were sold to big institutional investors and to help build this data center. And then META signs a long-term lease, pays rent, and basically guarantees that the asset will maintain a minimum value at the end because, in other words, meta is in. indirectly guaranteeing the credit of the SPV by saying that they are going to be a long-term

customer. And then that dramatically improves the SPV's ability to raise debt at a more reasonable interest rate in the markets. It's definitely not the least complicated concept that I've ever come across. And in case you ask yourself why they do this, there's an additional benefit to just not having that debt on your balance sheet. One of the most important part of it is that you actually tap into just a completely different pool of money. So you now have insurance companies and you have private credit funds that are desperate for exactly this kind of long-dated bond-like exposure to AI infrastructure. And that's a completely different market than, for example, the equity market.

And in a world where meta might need to finance tens of billions, potentially hundreds of billions of dollars, you can see why they would want more than just one funding channel, especially because if you go to the equity markets and you tell everybody, hey, we'll dilute you, that's never a good thing for the markets and obviously you will be sold off in the stock market. So that's a huge part of it. And I also learned this was quite interesting. I didn't know that before that this is sort of the classic infrastructure finance. So this is how pipelines, how power plants and telecom networks have been funded for decades. So I think that some are telling that suddenly you have these hyperscalers. You have companies like matter that are financed like a utility to some extent. And as you said, the scariest

part about all of this is that it appears matter and co, you know, all the other hyperscalers, I actually tied two contracts that for many, many years, they will pay money, be it in leases, be it in interest payments, but they will pay money and they will do that whether the AI vision is working out or not. I think this is going to be, well, I think it's a period that will be studied in business and economic textbooks for many generations to come. How about that's one way to put it? And so on one extreme for, what you could imagine happening. You might say that the most powerful businesses in the world are all hurling themselves off a cliff simultaneously in one collective mania with all these bets on

AI. Or on the other extreme, they're using their financial firepower in global dominance and tech to cement their role in one of the biggest productivity breakthroughs in human history. And obviously that would be quite profitable. So just a little bit of hyperbole there, but those are sort of Truly the two ends of the spectrum that are on people's minds when they're thinking about what's happening. Because all of it really is, I don't want to say unprecedented, but it's at a dramatic, dramatic scale. It's also just a huge rethinking of these companies.

I think I mentioned it to you earlier. But if you think about what Amazon did with AWS in the beginning, a lot of people said, you know, the problem with this is you have highly profitable company, a high margin business. Now suddenly you have this huge KAPS, right? this huge amount of money that you for a very long time, basically without a stop, have to invest in the business. And people were saying, this is probably a lower margin business. Why would I want to own a business that has lower margins instead of higher margins? But obviously,

what you need to compare is the absolute amount of money that you can earn and also deploy. If you can deploy tens and hundreds of billions of dollars into a certain segment in your company, and you can earn a 10% return on that, there could be much more money than you invest in a capital light business model where you make a higher return, a higher margin generally, but you can deploy significantly fewer capital. So the way I would see this to Samax-And is that all of the hypers are now going through what Amazon went through when they sort of pioneered the Google Cloud business where maybe these businesses will be lower margin going forward, but they can deploy

a lot more capital and in absolute terms make a lot more money than they could five or ten years ago. And I guess if we just zoom out a little, the most realistic outcome, especially for Meadow, is somewhere in between all of the mentioned scenarios here in this episode. So go for the enterprise cloud, rent out a slice of access compute on short-term contracts, for example, then focus on internal AI and improving the ad engine and sort of the vision of infinite ad loads and then build AI agents for the family of apps to support the SMB customer.

So if you ask yourself why I build a position despite all the doubts that we're sort of mentioning here about matter, I think to me it comes down that I believe matter is just attractively priced because people see AI spend as sort of black and white. So either Matters, super intelligence and cloud vision all work out and it's a huge success and that's obviously not what the market is currently having a lot of faith in. Or it's a huge mistake that costs the company's future because they spend too much money. And I might be naive. That is a possibility, but I think the truth is somewhere in the middle. And if that's the case, I think matter is attractively valued today, although I should say that it's clearly not even close to as much of a bargain

as it has been in 2022. The black and white picture, I think is a really good analogy for Zuckerberg himself too. I've seen so many comments saying he's one of the worst CEOs in history and that everything he touches fails. And he is probably not the most talented CEO at launching new products, but I'm not sure you can be one of the longest lasting CEOs and founders in the tech industry and build a $1.5 trillion company if you're just completely incompetent, right? That goes without saying. And I should also add that we own another company that was in a similar position a while ago, and that was Google, right?

They once sold off by almost 30% because investors really dislike the idea of Google expanding beyond search and spending money on unrelated things like Gmail, sheets, docs, YouTube, and Android. Beyond that, Google's other bets division is also notorious for burning through money at a pretty impressive rates. Yet, I don't think you'll find many people today who would say that this was the wrong decision. I'm not saying it will be the same with meta, but it is a good example of the market can be nervous about uncertainty around large spending of money, although that might be the best long-term decision in some cases. And we should say, and this sort of goes back to the defense argument, that meta is vulnerable as long as it is an ads-only business. I mean,

I've said somewhat potentially that it has an impenetrable mode, but of course, cause that's never fully true, right? There's an end to everything. And just as much as I love many Instagram ads, it's also a fact that many scammers advertise on Instagram and on Facebook, and you have a lot of AI slop, public resentment towards matter, and so on. So there are a lot of things that don't go right. And I think there's always potential for a new player in town. And if 2022 has shown as anything, then something like an app, you know, like TikTok, can just come up and also go out to hundreds of millions of people basically overnight. And matter won't be just to buy any of those competitors today. They might have done so 10 or 20 years ago.

Today there would be a lot of regulation around it. So they have to be cautious not to become a victim of the innovator's dilemma. So when we did a revisit of Uber a couple of weeks ago, I didn't put together an updated valuation primarily because I thought things in some sense hadn't changed too fundamentally, not that the financial situation hadn't changed, right? Uber has compounded its earnings and retained value a great deal. But more so, that we already felt very confident in wanting to own Uber, and we thought only good things had transpired in the last year. So we didn't need a model to tell us whether we should own Uber or not. I have a feeling that things are different here with meta, and we should maybe think about

the modeling side of things a bit because we have split conviction on it. Yeah, I would say that feeling is quite accurate. So I decided to build a model that's slightly more detail this time, simply because you have all this depreciation and the schedules there. And the CAPEX, eG, are so enormous that you can't just use averages or, you know, perhaps a fixed cash flow conversion. It just wouldn't work for META going forward. So in my updated base case, META produces basically no free cash flow between 2026 and 28.

We're slightly negative actually in 2026, massively negative in 2027, and then we roughly break even in 2028, then only in 2030. So at the end of the decade, or basically the beginning of the new one, we see close to $90 billion of free cash flow again. And if you want to go through all of the assumptions, please go to our newsletter. You know, if we have too many numbers here, it's quite complicated. Over there, we can explain a bit more about how we get to all of that. So looking at all three scenarios, the bear, the bull, the base case. In the bear case, cabex has been climbing in my assumptions to about $230 billion.

dollars, margins are basically staying stuck at around 30%, and then growth is obviously fading over time. The base case is the ad and messaging story working, while CAPEX plateaues at around $200 billion and margins recover to the high 30s at the end of the decade. And then the bull case is the, you know, what we talked about, every pixel turns into an ad thesis working out. And that would mean that you have growth near, for example, 20% over the next couple of years. Margins go back about 40%.

CapEx reaches 200 billion in 2027, but is then declining about 10 to 20 billion a year, and that's sort of the main setup. So do you expect CapEx to stay high in all three scenarios? It seems it's hard to imagine otherwise. Yeah, I think that's just how matter and most of the other hyperscalistakers work now. I don't see them stepping back from the Capix commitments that they have done. So my basic assumption now is that you will have hundreds of billions that will be paid out and you now sort of have to see how that impacts the valuation.

So in this case, it also means just putting a multiple on the 2030 cash flow per share isn't really accurate because by 2030, depreciation from today's spending is already crushing margins, but 2030 free cash flow is still also reduced by that year's $190 billion of capax. So that method would sort of charge for the buildout twice and you wouldn't stop. You don't get to a normalized level. So I decided to go and it doesn't get less complex with three different terminal value approaches this time. So first, we do take my old free cash flow multiple method, which effectively assumes the

KAPX never normalizes because of the multiple on depressed margins and cash flows. In the second approach, we also use a multiple, but we do assume sort of a normalized KAPX in 2030 and thus also normalized margins and cash flows. And normalized in this case means that I've just made an assumption on the, cap-x to depreciation and amortization ratio that we have seen historically. Again, more details will follow in the newsletter. But if I expand to this year, it would just get way too boring. And the third version is a plain PE on 2030 earnings. Perhaps the easiest, perhaps also my preferred way, because depreciation already runs through the cost of the build-out and through earnings.

And when you compare all the fair values of these approaches, you would get to a base case fair value, which is somewhere around $650 to $750 per share. So from my perspective, is this the most obviously compelling moment to buy meta? Probably not. And I would say that it was much more so in 2022, as you also mentioned. And one of my issues with meta is that their cap-ex spinning just seems so much more speculative than Alphabet and Amazon, where they have at least a more plausible explanation for what they'll do with all this computing power that they're investing in.

But like you've said, with meta, they can unlock a lot of value by just embracing what they are and not betting the farm on trying to be some revolutionary AI platform. And that plus the Metaverse stuff, the negative impacts on society, especially for young people and the regulatory effects of that. And all that to say, I'm not sure the margin of safety is so clearly wide that I feel compelled to buy shares in meta tomorrow. And honestly, I'd be more excited probably to accumulate. shares in Alphabet or Amazon with any incremental capital we invest or some of the other great

businesses we already own, which is not to say I don't think meta won't do incredibly well. I'm sure that they probably will do well. It's not a business that I want to bet against, but the question is relative to our other opportunities, is this the best place to invest an incremental dollar of capital at this exact moment of time? And I don't know. I don't think I'm sold on it yet, but maybe I'll eventually get there. I think that skepticism is quite fair. To be honest, I got to say that I might have come out of my research slightly less bullish than when I actually went into it. And I think a common argument right now is that matter is the max 7 with potentially the most optionality, especially given its valuation and everything that Mark

Zuckerberg is putting out there that could potentially work out for matter in the future. And I would generally agree with that. I think there's a lot of stuff that we couldn't even get to today. So for example, meta just launched a new marketplace app called seller on Facebook. And also there's a lot of optionality for Meadows. Mew Spark LLM, where I quickly mention it today, it comes into ad creation for meta customers, right? There are immediately millions and millions of customers and a lot of margin to make. However, all of that optionality comes at a high price, not necessarily in terms of the stock price, but primarily because of all the capax and also all the lawsuits that we will still see

in the future. And the things Zuckerberg spends the most money on, it kind of seems like they are the most uncertain. I could really see how AR glasses, take another decade before they actually become mainstream if they ever do. And that can mean tens of billions of dollars in investments until that point. And in the cloud and the superintelligence ambitions, they would probably take even more money and potentially the same amount of time. So I'm not sure. You have a margin of safety there because you can sell access compute, but this is not really an exciting way to invest in the stock. And what I liked about matter before is that if none of this works out. You are left with the biggest and most profitable advertising business in the world,

but looking at all these long-term obligations that especially you pointed out, I think there's a risk that the business will be dragged down for a very long time. And I will definitely not sell any of my shares in my personal account, but I won't push you and Kyle to own it into the intrinsic value portfolio either, because I think you're not fully convinced. And I know that Kyle has a strong opinion on the questionable capital allocation decisions made by Mark Zuckerberg. and to him that's always a sort of a no-go, as he told us before. All right. And with that, let me close it for today with a quote by Wilson Mark Zuckerberg

that might also explain his constant urge to spend and reinvent matter to Samarkson. He said the biggest risk is not taking any risk. And in a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks. And with that and today's episode, see you all in the next one. Thanks for listening to TIP. Follow the Investors podcast on your favorite podcast app and visit the Investorspodcast.com for show notes and educational resources.

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