Thesis
The trade is a long on Meta after the stock fell on a quarter that beat estimates and raised guidance. Q3 revenue was $64.6B, up 26% year over year, against a $63.4B consensus. Ad prices rose 14% and impressions rose 10%. Daily active people reached 3.64B. Q4 revenue guidance is $73B to $76B, against roughly $74B expected. Muse, Meta's AI assistant, has been the top free app on the US App Store and Google Play for most of the time since its September launch (Financial Times). Even so, the stock is at $663, down from a $697.52 close and about 15% below its $779.82 52-week high.
Investors sold for three reasons:
- Cash flow turned negative. Q3 capex was $34.91B, slightly more than the $32.79B of operating cash flow, for free cash flow of about -$2.1B. Stock Titan says equipment purchases last topped operating cash in 2012.
- Capex keeps rising. Meta raised the low end of its FY26 capex range to $135B to $145B.
- There is a new share class. Non-voting Class C shares go to existing holders as a stock dividend in January 2027. Meta can then sell them to raise money, pay employees and fund acquisitions (CFO Susan Li via Pivot News).
The ad business is growing faster than the share count is likely to. At a market cap of about $1.8T, a $50B stock sale would add roughly 3% more shares. Revenue is growing 26%.
Why stock over options: Before earnings, META's IV percentile was 89.3 and IV rank was 61.95, so options were expensive. Owning the shares avoids paying that premium while implied volatility comes back down after the report.
Main risk: The Class C share sales. Yahoo Finance's Brian Sozzi calls the new share class an "overhang" on the stock. It could weigh on the price until Meta says how much it will sell and when. Hitting the top of capex guidance means about $59B of Q4 spending (Zerohedge's math), so Q4 free cash flow could be negative again.
What else could go wrong:
- Market risk: Beta is 1.60. Markets now expect rate hikes and oil prices are tied to the war, so a broader selloff in AI stocks would hit META harder than the index.
- Legal costs: A charge tied to the agreement with state attorneys general hit Q3 GAAP EPS, and more legal costs are possible.
- Earnings timing: Meta just reported, so the next earnings date should be months away.
- Liquidity: The rating is 3. The bid-ask spread was under $1 at the open, which is fine for buying shares.
A close below about $620 would suggest the market is pricing in more dilution, and the position should be reconsidered at that point.