META is undervalued; efficiency gains in AI hardware and custom chips improve core ad profitability, outweighing short-term FCF pressure from high capex.

Yeah. So my first one is might seem very strange because it's not a direct beneficiary of what Nvidia has told us. One of the two is but the first one I'll talk about is Meta.

Now Meta of course spends an insane amount of money on Nvidia chips but it also spends an insane amount of money on making its own custom chips. But the connection here is about cost and not revenue.

So when Nvidia said that its new Vera Rubin chip delivers 30 times more throughput per megawatt and 35 times lower cost per token than its prior generation. Well, if that is true and Meta can get the same AI workloads for less money, of course, Meta's business, Meta's core business is going to look much much better.

Now, right now, Meta's core business, which is basically the ads business, is actually doing extremely well. has generated $59.4 $4 billion last quarter grew by 27% year-over-year and the management said that it was directly driven by AI rankings is that's basically the big part of the growth here whenever you go on on Instagram the res on Facebook you name it of course if ad targeting becomes better and better the whole ecosystem becomes better the advertisers the return on ad spend is better as well it's good for the advertisers it's probably good for for the people that consume the ads cuz now you're actually getting ads from things you might you might be interested in and you might maybe buy it as well.

So that's a win there. You get to use a service for free basically. Yes, you get targeted with advertising, but it's in my opinion a win-win everywhere. This could of course push the e-commerce play more and more for Meta.

But I know this is a bit of an indirect way to explain how Meta's business benefits from all of this. But I do think that because Meta's core business today is already so profitable.

If suddenly the GPUs that they're buying are becoming also more efficient, more cost effective for them, it will just make their core business even better.

And then the next step of course is their own models, right? MSpark came out a couple of months ago. I do think yes, it took it took time until Meta really came out with a great model.

I believe they're going to come out in a couple of weeks with their next model. The code name there is watermelon.

But I do think that once they figured out that okay, Muark, that's a great baseline for us, which of course is running on Nvidia's GPUs as well. they can start building on top of it whether it's for their smart glasses VR or everything else that they want to do.

They want to sell maybe more AI services to advertisers to companies to run their business on Meta's own stack.

And if they can do this when the hardware layer becomes better and better, it just benefits the whole company. Today I view this as an extremely undervalued business. It is being overlooked because of the huge capex right now.

So it is putting free cash flow under pressure today.

There was a trial that was going on. They settled that in my opinion. They they came out of it as as winners as well because there is part of the money that they have to pay that they're only going to pay if their big competitors YouTube and Tik Tok participate in the change.

And so while Meta might not be the direct beneficiary here, indirectly I do think they win from the upcoming uh Nvidia products. >> I think that's right. I mean also I I think it's easy to forget that the software is useless without the actual hardware, you know, to run it.

And we saw that that Zuckerberg essentially realized that renting server space from other companies would be a losing strategy long term. And so Meta is spending an absolute fortune to build their own data centers.

Um, and I think this is again so that they never really have to rely on anyone else in that way.

You know, they've raised their capex expectations for the year. I think up to $145 billion as of the last numbers that they put out. And a significant chunk of that is going straight into Hyperion, which is their new $50 billion data center project in Louisiana.

Um but they're also actively constructing AI optimized data centers in El Paso, Texas, in Indiana, uh in Oklahoma. So there is a lot to watch uh where that's concerned.

And Meta has of course partnered with, you know, private equity and financial uh giants like uh Blue Capital and and Black Rockck to fund these multi-billion dollar projects as well.

So when you look at this, you know, yes, they're spending a lot of money on construction and chips. We saw their their quarterly free cash flow plummeted to about 784 million down from over 8 billion last year.

I think the bottom line is Meta needs to prove these investments can actually make their core ad businesses more profitable. Now that's not something they can prove in a quarter or two, right?

That takes time. There's construction timelines and then there's of course optimizing the ad business. But if they are not able to prove that, they'll just be burning cash at a huge scale.

But I do tend to think uh that Meta is very much going to come out on the other side of this a better and stronger company. I think these are the growing pains that it is experiencing right now.

I think it's investing to grow. Um but we certainly can understand why some investors have not been thrilled by some of the numbers we've seen come out in their recent financial reports.

>> Yeah. And you know what worst case scenario they are going to sell compute for a huge premium and and they've told us that they've had a lot of demand for it and they can charge a premium which means they can then if they do decide to let's say use a a big GPU cluster for outsiders then they can tell the market look this is the number that we can provide you with regards to that are you happy with that number because the big advantage that an Amazon a Google a Microsoft have is is the cloud business.

Yes, we're spending hundreds of billions of dollars, but look, our cloud business is accelerating, margins are expanding. With a meta right now, they can just say our core business is getting better, but they cannot really tell us, oh, our pure ads business uh ads AI business is getting even better and better because there is no cloud business for them.

Maybe in the future they'll break down at AIdriven ad services or something like that. maybe subscription services probably over the next maybe 12 to 18 months or so, but as of right now, not