Meta 1Q26 earnings: Why investors may be underestimating its AI monetisation strategy

Key Points

1Q26 earnings highlights

Meta reported 1Q26 revenue of USD 56.31 billion, up 33% year-over-year and ahead of consensus estimates of USD 55.51 billion. The strong performance was primarily driven by continued momentum in its Family of Apps segment, which includes Facebook, Instagram, WhatsApp, Messenger, and Threads.

Family of Apps advertising revenue rose 33% year-over-year to USD 55.0 billion, while Family of Apps other revenue increased 74% year-over-year to USD 885 million, driven largely by growth in WhatsApp paid messaging and subscriptions revenue.

Reality Labs revenue declined 2% year-over-year to USD 402 million due to lower Quest headset sales, although this was partially offset by strong growth in Meta’s AI glasses business.

Diluted earnings per share came in at USD 10.44, significantly above consensus estimates of USD 6.65. However, the figure benefited from an USD 8.03 billion tax benefit related to updated US Treasury guidance on the tax treatment of previously capitalised R&D expenditures. Excluding this tax benefit, net income and EPS would still have reached USD 18.7 billion and USD 7.31 respectively, comfortably above market expectations.

Table 1: Meta Q1 earnings

Looking ahead, Meta expects second quarter 2026 total revenue to be in the range of USD 58-61 billion, broadly in line with consensus estimates.

The company also raised its 2026 capital expenditure guidance to USD 125–145 billion from a previous range of USD 115–135 billion, citing higher component costs and additional data centre spending to support future capacity.

The higher CAPEX outlook weighed on investor sentiment, with Meta shares falling more than 8% the following day as investors questioned whether the company has a sufficiently clear path to monetising these investments.

Meta is already monetising its AI spending

Unlike peers such as Alphabet and Amazon, Meta lacks a large cloud computing business that directly monetises AI infrastructure through enterprise demand. This has led some investors to question whether Meta’s AI investments will generate comparable returns on invested capital. However, the latest quarter suggests these concerns may be overstated.

Meta is already leveraging AI extensively to enhance the performance of its advertising ecosystem, which remains one of the most profitable digital advertising businesses globally. Its AI-powered models are driving higher engagement by surfacing more relevant content to users, while improving outcomes for advertisers through better conversion efficiency.

In 1Q26, these improvements were clearly reflected in user engagement metrics. Content ranking enhancements drove a 10% increase in Reels time spent on Instagram, while total video time on Facebook rose more than 8% globally, marking the largest quarter-over-quarter gain in four years. These gains were driven by improvements in model performance, including better prioritisation of more recent content and improved content relevance, as well as AI-translated videos that expanded accessibility and diversity.

Stronger engagement, in turn, is enabling Meta to optimise ad load more effectively, increasing the number of advertisements shown without materially degrading user experience. As a result, ad impressions across Meta’s Family of Apps rose 19% year-over-year in 1Q26.

At the same time, Meta is also capturing pricing power from improved advertising efficiency. Enhancements to its ad systems delivered more than a 6% increase in conversion rates for landing page view ads during the quarter, reflecting stronger return on ad spend for advertisers. This improvement has supported a 12% year-over-year increase in average price per ad in 1Q26, reflecting advertisers’ willingness to pay more for higher-quality outcomes.

Figure 1: Ad impressions and average price per ad have been consistently growing

Taken together, higher ad volumes driven by stronger engagement and higher pricing driven by improved ad performance are jointly reinforcing Meta’s revenue growth trajectory.

More importantly, these monetisation gains are occurring before many of Meta’s newer AI initiatives have meaningfully contributed to revenue.

Emerging monetisation opportunities beyond advertising

While advertising remains Meta’s core monetisation engine, the company is also beginning to show progress in building additional AI-driven revenue streams.

One of the most promising areas is AI glasses. Management disclosed that the number of people using Meta’s AI glasses daily tripled year-over-year, with the category continuing to rank among the fastest-growing segments in consumer electronics. Meta’s partnership ecosystem with eyewear companies also continues to expand. Beyond Ray-Ban and Oakley products, management indicated that additional partnerships and styles are expected later this year.

Meta AI itself — now powered by the company's new Muse Spark model from Meta Superintelligence Labs — is also seeing strong early momentum. Sessions per user have grown by double-digit percentages following the model's broad rollout. While Meta has not yet launched a paid subscription tier, the monetisation model is clearly there. With ChatGPT, Claude, and Gemini all generating meaningful revenue from subscriptions, Meta's massive existing user base gives it an enormous built-in distribution advantage.

Another particularly promising area is Business AI. Weekly conversations facilitated through Business AIs on WhatsApp and Messenger have surged from 1 million at the start of 2026 to more than 10 million — a 10x increase in a single quarter. These are businesses using AI agents to engage customers on Meta's messaging platforms. Business AIs are currently free for businesses, but management stated clearly that the company intends to establish a longer-term monetisation model as adoption scales.

Taken together, Meta’s AI investments increasingly resemble a multi-layered monetisation strategy rather than a purely speculative infrastructure buildout.

Litigation risks are likely manageable

Meta is facing rising legal and regulatory scrutiny linked to youth safety concerns and has recently suffered two high-profile legal setbacks. In the Q1 earnings call, management flagged that additional trials scheduled for later in 2026 “may ultimately result in a material loss”.

In California, a jury awarded USD 4.2 million to a plaintiff whose lawyer argued that Meta’s platforms contributed to social media addiction and mental health struggles, citing design features such as notifications, likes, autoplay videos, infinite scroll, and beauty filters.

Separately, a New Mexico jury ordered Meta to pay USD 375 million after determining the company misled teenagers about the safety of its platforms and failed to adequately address child sexual exploitation risks.

While the direct financial impact of these verdicts is negligible relative to Meta’s earnings power (USD 60 billion in net income in 2025), investors are more concerned about second-order effects. Adverse rulings could encourage a wave of similar lawsuits built on the same legal arguments, while also increasing pressure on regulators to introduce stricter rules around algorithm design and youth access. Such measures could, in turn, have implications for engagement and monetisation.

That said, several mitigating factors suggest these risks remain manageable.

Firstly, Meta has already implemented a range of youth safety initiatives, including Instagram Teen Accounts with parental supervision tools and stricter content controls. More recently, the company announced plans to use AI to identify and remove potentially underage users. This includes analysing profiles for contextual signals such as birthday celebrations or discussions about school grades, as well as scanning photos and videos for age-related cues. Together, these measures could help reduce the likelihood of further regulatory escalation or mandated platform changes

Secondly, teenagers represent a relatively small share of Meta’s overall monetisable user base. According to Digital Applied, users aged 13 to 17 account for only around 8.2% of Instagram’s total users, suggesting that even stricter youth-focused restrictions would have a limited impact on Meta’s broader advertising base.

Third, any tightening of national regulations in the US could paradoxically reinforce Meta’s competitive position. Larger platforms are generally better equipped to absorb compliance costs and adapt product experiences, potentially widening the gap versus smaller competitors.

Valuation remains attractive

Meta’s management has not provided investors with as much clarity on its AI monetisation pathway as the market had hoped, contributing to the recent share price weakness. However, for patient long-term investors, we view the sell-off as an attractive opportunity to accumulate shares at a discount.

Despite revising down our earnings projections to account for higher depreciation expense from greater CAPEX over the coming years, we continue to see compelling long-term upside potential.

Applying a fair price-to-earnings multiple of 23x to projected 2028 earnings, we derive a target price of USD 1,018 for Meta, implying upside potential of roughly 70% from its closing price on 11 May 2026.

Table 2: Projections for Meta’s earnings

Figure 2: Share prices are driven by earnings growth in the long run

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a position in Meta Platforms.