Editor's Note: Meta's latest earnings report reveals a core contradiction in Big Tech's AI investments: artificial intelligence has already begun generating revenue for existing businesses, but the investment required to build next-generation AI infrastructure remains far ahead of the profit realization from new businesses.

On October 22, Goldman Sachs released its research report on Meta's third-quarter results, titled "Q3'26 Review: Core Advertising Momentum Builds," maintaining a "Buy" rating on Meta and raising its 12-month target price from $860 to $885.

Goldman Sachs' bullish case for Meta is not simply a bet on AI products, but rather its view that the core advertising business is continuing to prove the commercial value of AI investments. At the same time, the newly launched AI Agent platform Muse also opens up new growth opportunities for Meta in subscriptions, shopping transactions, and enterprise services.

On the other hand, however, Goldman Sachs expects Meta's 2027 capital expenditures could reach approximately $230.3 billion, with capex as a percentage of revenue approaching 73%. This means that even if advertising revenue continues to grow, the company may still face pressure on profit margins and free cash flow.

Therefore, Meta's core question going forward is no longer simply whether AI can drive growth, but whether growth can be fast enough to cover the continuously expanding computing and infrastructure costs.

The following is the original text:

Advertising business remains Meta's biggest growth confidence

Meta achieved total revenue of $64.601 billion in the third quarter of 2026, up 26.1% year-over-year, beating Goldman Sachs' prior estimate of $63.702 billion and the market consensus of $63.517 billion.

Among this, Family of Apps revenue reached $64.158 billion, up 26.4% year-over-year; advertising revenue reached $63.061 billion, up 25.9% year-over-year. Advertising revenue in the US and Canada grew 33.3% year-over-year, continuing to be an important growth driver.

However, revenue growth did not translate into reported profit growth in tandem. Meta's third-quarter GAAP operating income was $12.988 billion, with an operating margin of approximately 20.1%, below Goldman Sachs' prior estimate of 30.4%.

It should be noted that the quarterly results included approximately $9.89 billion in charges related to a teen-related litigation settlement. According to Meta's financial report, excluding this charge, operating income would be approximately $22.88 billion, and diluted earnings per share would rise from $3.83 to $7.40. Therefore, the decline in the reported margin for the quarter cannot be entirely attributed to AI investments.

In Goldman Sachs' view, what is more noteworthy than single-quarter profit is that the AI technology Meta previously invested in has already begun to generate measurable returns in its advertising business. In the third quarter, more than 10 million advertisers used at least one of Meta's generative AI advertising features, with adoption of the video generation feature growing 25% quarter over quarter.

In addition, advertisers that adopted suggestions from Meta AI Business Assistant saw about a 5% increase in conversations while maintaining the same cost per conversion, and subsequently spent 9% more on advertising than similar non-adopting advertisers. This means AI can not only improve the content users see, but also help advertisers improve conversion efficiency and further enhance the platform's appeal for advertising budgets.

This change is especially important because Meta has a massive existing business ecosystem. Company survey data shows that at least about 500 million self-identified small businesses use its family of apps to reach customers.

Goldman Sachs believes that as the penetration of AI advertising tools among existing advertisers increases, Meta still has room to further raise its advertising revenue expectations. And because the core advertising business itself has strong profitability, further upward revisions to revenue forecasts could also bring significant incremental gains to the company's overall operating profit.

From this perspective, Meta's AI strategy is not entirely about waiting for a future new product to succeed. It already has a large and mature commercialization system that can directly translate algorithm improvements into advertising efficiency and revenue growth.

Muse shows commercialization potential, but scale still faces cost thresholds

If the advertising business represents the AI returns Meta has already validated, then Muse represents the second growth curve it may form in the future.

Goldman Sachs noted that Muse, as a consumer-grade AI Agent platform, quickly gained user attention after launch. As of the third-quarter earnings release, management disclosed that Muse had accumulated nearly 10 million downloads in the United States and Canada.

At the same time, Muse's daily user engagement is about 25%, and shopping has become one of the most representative use cases on the platform.

According to data disclosed by management, more than 25% of Muse's weekly active users use its shopping feature, with an average purchase amount exceeding $200. This set of data drew Goldman Sachs' attention because, compared with traditional chatbots, shopping, consumption decisions, and transaction execution imply clearer commercial intent and may also bring more direct revenue sources.

Meta management believes that Muse has multiple monetization paths in the future, including subscriptions, commercial transactions, advertising, and paid services for enterprises. Among them, subscriptions may become an earlier model to be implemented, while shopping and enterprise services are expected to form longer-term growth space.

Goldman Sachs also specifically mentioned the synergy potential between Muse and Meta's existing app ecosystem.

According to data disclosed by management, U.S. Muse users currently contribute an average of several hundred dollars in annual revenue across Meta's family of apps, with about 20% of users corresponding to an annual Family of Apps ARPU exceeding $1,000.

This phenomenon indicates that Muse's early users have high commercial value, but it should be distinguished that this revenue comes from the existing family of apps and does not mean that Muse itself has already achieved monetization at the same scale.

For Meta, if AI Agents can directly participate in shopping recommendations, advertising placement, and commercial transactions in the future, it may be possible to establish new revenue sources beyond existing advertising revenue.

In the longer term, Muse may also enter the enterprise and small and medium-sized merchant market, helping merchants acquire customers, handle business processes, and enabling consumer Agents and merchant Agents to directly complete transactions.

However, this growth opportunity still faces practical constraints.

Muse's operation relies on a large amount of inference computing power, and an expansion in user scale means higher computing and service costs. Management expects that within the next year, Muse's computing cost efficiency is expected to improve by more than 10 times, mainly from model optimization, improved inference efficiency, and fuller utilization of idle computing power.

Goldman Sachs believes that this efficiency improvement is very important for Muse's large-scale rollout. But before achieving stable revenue, the company still needs to continue investing in infrastructure.

Therefore, the key test for Muse is not whether it can continue to gain downloads, but whether user engagement, transaction behavior, and commercialization revenue can ultimately support a business model with sustainable profit margins.

Capital expenditure may reach $230 billion in 2027, AI investment enters a high-intensity phase

Compared with Muse's early growth, Goldman Sachs believes that AI infrastructure investment and its impact on financial conditions remain the core issues for investors. Meta management narrowed its 2026 capital expenditure guidance to $135 billion to $145 billion, compared with the previous range of $130 billion to $145 billion.

But in Goldman Sachs' forecast, 2026 may only be the starting point of a new round of capital expenditure expansion.

According to the research report, Goldman Sachs expects Meta's capital expenditure in 2026 to be approximately $141.2 billion, further growing to approximately $230.3 billion in 2027, a year-on-year increase of 63.1%. Capital expenditure in 2028 is expected to reach approximately $250.4 billion.

This means that Meta's capital expenditure as a proportion of revenue is expected to reach 72.9% in 2027, and remain at a high level of 66.9% in 2028.

It should be emphasized that the above capital expenditure figures for 2027 and beyond are forecasts by Goldman Sachs analysts, not official annual guidance released by Meta management. Meta stated in its latest earnings report that the 2027 budget and computing capacity planning are still being formulated, but it expects to continue actively investing in AI.

The growth in capital expenditure will further affect the company's depreciation expenses, profit margins, and free cash flow.

Goldman Sachs expects Meta's depreciation and amortization expenses to grow from approximately $18.6 billion in 2025 to approximately $34.7 billion in 2026, and reach approximately $63 billion and $94.9 billion in 2027 and 2028, respectively.

At the same time, Goldman Sachs expects Meta's free cash flow to decline from approximately $46.1 billion in 2025 to approximately $6.4 billion in 2026, turn negative at approximately -$33.5 billion in 2027, and slightly recover to approximately $1.4 billion in 2028.

This indicates that even if Meta's revenue and operating cash flow continue to grow, large-scale infrastructure construction may still significantly compress its discretionary cash in the coming years.

In fact, Meta's cash flow from operating activities in the third quarter of 2026 reached $32.79 billion, but free cash flow for the quarter was still -$2.12 billion, already reflecting the impact of capital expenditure on cash flow.

On the other hand, Meta is also adjusting the allocation of investment among different businesses.

Management expects Reality Labs' annual operating loss to reach approximately $18 billion to $19 billion in 2026, and narrow to approximately $15 billion in 2027. Goldman Sachs believes that the narrowing of Reality Labs' losses will help alleviate some operating cost pressure, but considering that AI computing investment will continue to increase, this improvement is not yet sufficient to fully offset the impact of a new round of technology investment on profit margins.

In addition, Meta's announcement of the establishment of non-voting Class C common stock has also raised investor concerns about the future capital structure and financing arrangements.

Goldman Sachs noted that this arrangement provides Meta with a more flexible capital structure, but management did not indicate on the earnings call that the company would immediately engage in financing activities as a result.

Therefore, in the coming quarters, investors may pay closer attention to Meta's financing needs, computing power utilization efficiency, and the extent to which new business revenue can cover infrastructure construction costs.

Goldman Sachs Raises Target Price to $885, Bullish on Long-Term Growth

Although capital expenditures may continue to weigh on financial performance, Goldman Sachs remains positive on Meta.

Goldman Sachs raised Meta's 12-month target price from $860 to $885, maintaining a "Buy" rating. Based on the reference stock price of $697.52 listed in the research report, the new target price implies approximately 26.9% upside potential.

In terms of earnings forecasts, Goldman Sachs raised Meta's 2026 revenue estimate to approximately $257.2 billion and its 2027 revenue estimate to approximately $315.9 billion.

However, with cost forecasts adjusted accordingly, Goldman Sachs lowered its 2026 earnings per share estimate from $31.67 to $28.84 and its 2027 earnings per share estimate from $32.26 to $31.02.

This adjustment reflects Goldman Sachs' dual assessment of Meta: revenue growth prospects have improved, but the continuously expanding scale of investment still weighs on short- to medium-term profitability.

In terms of valuation methodology, Goldman Sachs uses an enterprise value-to-GAAP operating income multiple and an adjusted discounted cash flow model, each weighted at 50%.

According to its scenario analysis, in the base case, Meta's target price is $885; in the bear case, the valuation could drop to $520; in the bull case, the valuation could reach $1,170.

Goldman Sachs believes that the core variables affecting Meta's stock price performance in the future mainly come from three aspects.

First is whether the core advertising business can sustain strong growth. With the further proliferation of AI recommendation algorithms, ad generation tools, and business assistance features, Meta has the opportunity to continuously improve advertising conversion efficiency and strengthen its competitive position in the digital advertising market.

Next is the commercialization progress of Muse. Although Muse has already accumulated an initial user base and demonstrated strong demand for shopping use, whether it can establish a sustainable revenue model from subscriptions, transactions, and enterprise services remains to be further verified.

Finally, and most importantly, is whether the economic returns on AI investment can gradually materialize. If compute utilization, inference efficiency, and model operating costs continue to improve, Meta will have the opportunity to expand the scale of its AI products while improving investment efficiency.

Conversely, if capital expenditures continue to increase while new business growth or computing efficiency gains fall short of expectations, the company may face longer-lasting margin pressure.

Goldman Sachs also cautioned that Meta faces competition from internet, media, and e-commerce companies, as well as uncertainties including regulatory scrutiny, antitrust risks, and AI commercialization falling short of expectations.

Over the long term, Goldman Sachs still believes that Meta sits at the intersection of structural growth trends such as AI, social platforms, and spatial computing, and that the cash flow and commercialization capabilities provided by its core advertising business lay the foundation for the company to explore next-generation AI products.

However, against the backdrop of rapidly expanding capital expenditures, the market's criteria for evaluating tech companies are also changing.

In the past, investors focused more on how many resources tech companies had invested in AI; in the future, the market may care more about how much incremental revenue, profit, and free cash flow these investments can ultimately generate.

For Meta, the advertising business has already preliminarily proven the value of AI, while Muse has demonstrated the possibility of a next-generation business model. The real question that remains to be answered is how to ensure that increasingly massive AI infrastructure investments ultimately translate into sufficiently substantial and sustainable shareholder returns.

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