META is undervalued, though less than two months ago, and a hold: revenue growth above 20% and rising underlying profitability support it at 13.5 times operating cash flow. Costs, capex and legal expenses will pressure near-term profit, and free cash flow may stay negative into 2027; he would add on a further fall.

Today I will review Meta's third-quarter earnings results that they just announced . As we can see, Meta's stock rose by 5% in evening trading at the time of recording this report .

On my channel, I strive to be as objective as possible, which is why I'm surprised that the stock hasn't fallen yet . This is because the report was full of ambiguity, as we shall see, and Wall Street could find many reasons to dislike the report and sell the stock.

Therefore, I consider the stock's rise in evening trading a gain for me as a Meta shareholder.

Okay, let's start from the beginning, where Mark Zuckerberg said: " Our investments are paying off, our core business is strong, and we are seeing rapid growth across the board."

Then we note a huge increase in revenue of 26% year-on-year to reach $64.6 billion. However, costs and expenses increased by 68%, resulting in a 37% decrease in operating income.

But net income is still up 264% year-on-year. Meta also disclosed that it incurred legal fees of $9.89 billion this quarter , which was expected given the company's prior announcement.

Without these legal fees, its operating income would have been $22.88 billion, and earnings per share $7.40 . So, as I mentioned, this is a complex report, but Meta's actual business profitability, in my opinion, is very high and continues to grow.

We now turn to the increase in the number of daily active users by 3% to reach 3.64 billion users, which is a truly amazing number . This means that roughly half of the world's population uses one of Meta's apps every day.

They then showed that the number of ads displayed increased by 10% year-on-year, and that the average price per ad increased by 14%.

Capital expenditures totaled $34.91 billion this quarter, while operating cash flow was $32.8 billion, meaning the company recorded negative free cash flow of approximately $2 billion.

Therefore, in this quarter, Meta's free cash flow has officially become negative, and as a shareholder, I expect this situation to continue for the foreseeable future.

They also noted a 15% year-on-year decrease in their staff numbers. Imagine this! Meta continued to grow its revenues by 26% while its number of employees decreased by 15% year-on-year.

This means that Meta's revenue per employee is seeing a massive increase , perhaps as much as 40% year-over-year.

Therefore, I believe the underlying profitability of this business is growing , because a large portion of operating expenses is simply allocated to salaries, and if the number of employees decreases and they are able to generate more revenue per employee , I believe the profit margins of this business have a chance to expand in the long term.

Okay, let's move on to the next screenshot. This screenshot shows the CFO's expectations , and it contains a lot of detail. The first key component indicates that the projected revenue is $74.5 billion, which is the mid-range of their forecast for the next quarter, representing a growth rate of 24.4%, thus exceeding analysts' expectations.

It appears, then, that Meta's investments in artificial intelligence continue to grow revenue very well. However, cost projections for this year have risen due to legal expenses of $10 billion, and are now expected to reach $177 billion.

Had it not been for these legal expenses, operating income would still have been high year-on-year in 2026, despite the company investing huge sums in artificial intelligence and the high cost of doing business.

Capital spending forecasts for this year remained in line with previous expectations, while rising by a minimum of 5 billion , and are now expected to range between 135 and 145 billion.

And that's what I think the market has approved of.

Meta then stated that it is developing its capital expenditure plans for 2027 and expects to continue investing strongly. In my opinion, this means that it will continue to spend more money in 2027, but it has not yet announced how much the increase will be.

But as a shareholder, I expect its costs and capital expenditure plans for 2027 to be higher than this year. The company then stated that its investments in artificial intelligence are generating significant growth in advertising revenue, stronger engagement, better recommendations, and greater profitability.

Meta added that she believes this shows that her investments in artificial intelligence are already paying off in her business. The company believes its business will also see revenue growth in 2027, but it did not specify the amount of this growth .

However, it believes that the launch of its new products and its investments in artificial intelligence will contribute to a greater increase in revenues next year.

Then, at the bottom of the page, they indicate that Reality Labs' losses are expected to continue declining to $15 billion next year. This gives Meta more money and more room to invest in its AI-related initiatives.

In short, capital expenditures and costs are expected to continue rising through 2027, with revenues also expected to continue growing. In my opinion, this means that net profit will likely remain under pressure until next year.

Moving on to the next screenshot, Meta announced the issuance of Class C shares to raise capital and equity-based compensation.

It indicates that the investment required for artificial intelligence is substantial, which is why these Class C shares are being issued. In my opinion, this means that Meta is telling the market that it plans to dilute its holdings at some point in the future to help fund the development of AI projects .

I am surprised that the market did not react more negatively to this news. Shareholders should expect some relief at some point , perhaps during the next year, in my opinion .

Okay, now let's move on to Meta's cash flow statement. Here we note that operating cash flow reached US$32.8 billion during the quarter, an increase of 9.3% year-on-year .

Operating cash flow has also increased by 21.7% since the beginning of the year. At first glance, a 9.3% growth in operating cash flow may not seem like a significant increase compared to last year.

But looking at the cash flow statement, we find that 2025 benefited from $20 billion in deferred taxes in the third quarter, and $17.7 billion since the beginning of last year.

If we exclude deferred taxes from all groups, operating cash flow is up 200% in the third quarter and 50.8% year-to-date in 2026. I think we will see better growth in real operating cash flow in the fourth quarter, as Meta will have paid its taxes in the fourth quarter of last year, which will provide us with a more realistic comparison.

Moving on to the capital expenditure item in the cash flow statement , we notice a significant increase in it. Once again, Meta recorded negative free cash flow this quarter. However, free cash flow remained positive throughout the year, at $13.8 billion.

But as I mentioned earlier, I would n't be surprised if Meta recorded negative free cash flow throughout 2027. We also note that Meta has raised $25 billion in debt so far this year, but the company still has a very strong balance sheet.

Overall, I expect them to accumulate more debt in 2027, while they work on developing artificial intelligence and continue to record negative free cash flow. The company has not officially announced this, but this is what I expect as a shareholder.

Okay, let's move on to the next screenshot. This screenshot shows ad revenue based on the user's geographic location. The rest of the world saw advertising revenue grow by 33%.

Revenues in the Asia-Pacific region rose by 15%. It rose by 17% in Europe, and by 33% in the United States and Canada, which are also the largest meta markets .

Therefore, Meta is experiencing the fastest growth rate in its largest markets, which is truly remarkable.

The following screenshot shows Meta's quarterly costs , and as you can see, the third quarter costs have increased significantly. This increase is mostly due to legal expenses, but even without them, I believe profit margins would have declined this quarter due to higher costs.

This increase in costs has led to a sharp decline in net income. However, I believe this does not reflect the company's true profit potential. However , I am still surprised by the market's lack of an overreaction to this .

Moving to the next screenshot, we note that average revenue per user reached an all-time high in the third quarter, hitting $17.72. It is also about $1.20 higher than the previous fourth quarter, i.e., the fourth quarter of 2025, which I have highlighted here.

Last year, the average revenue per user in the third quarter was slightly higher than the average revenue expected in the fourth quarter of 2024. But the situation is different this year, and I think this indicates that Meta will perform very strongly in the fourth quarter in terms of revenue and average revenue per user.

I also believe this illustrates how artificial intelligence contributes to increasing the revenue that Meta can generate from its user base.

The following screenshot shows that Meta ad impressions grew by 10% year-over-year compared to 14% in the third quarter of last year. This indicator may be more volatile, and its decline is usually accompanied by growth in average revenue per user, which is what actually happens.

Average revenue per user rose 14% year-over-year in the third quarter, compared to 10% in the third quarter of last year. So, the prices for ads on Meta are higher, but the growth in the number of ads displayed has slowed down a little. In my opinion, this is not a cause for concern.

As I mentioned earlier, I also listened to the Meta conference call and noted down the most important points I found. Firstly, it seems that Meta's Threads app now has more daily active users than the X app.

Therefore, I use the X app much more than Threads, and I have never downloaded Threads . Therefore, I find this really surprising.

After that, Mark Zuckerberg stated that the Meta Mews app had surpassed 10 million downloads, with a user retention rate of 25%.

That means 2.5 million people are still using Muse daily.

He then pointed out that the most common use of Mews so far is for shopping. So, Muse is driving more people to shop online, and the integration of Blade with it is experiencing tremendous growth.

Mark Zuckerberg then stated that he believes the Muse platform is capable of generating more revenue per user than Facebook and Instagram in the long run.

This is a surprising indicator, as we have seen, Meta's average revenue per user is around $18 this quarter . If Meta can generate this much quarterly revenue from Muse, the platform will become a huge source of revenue in the long run .

But it is clear that we have not seen that yet .

Mark then explained that Meta's current focus is on expanding the scope of Muse. He also noted that Muse's costs are expected to improve tenfold by the end of next year, which will lead to it becoming profitable within the next two years.

But at the moment, Muse is a burden on profit margins, causing them to decline. Mark then said that they had not yet discovered the limits of Muse's ability to accelerate their business growth.

Internal models improve Meta's business growth, and I think that's quite clear at this stage .

Meta is experiencing continuous revenue growth at rates exceeding 20%, which is a tremendous rate for a company of this size. He also noted that Meta is working on larger models that will be more powerful than Wonder, which is approaching the latest technology.

Therefore, Meta may be able to break through the boundaries of this field by 2027, and perhaps have the best model in the world. He then explained that Muse requires enormous computing resources, which is why it has not yet been released globally .

Simply put, Meta currently does not have sufficient computing resources to launch a global Muse agent .

As it continues to develop its computing resources, it will be able to expand Muse globally, and this clearly demonstrates the extent of the shortage of computing resources. Therefore, I believe that the overall expansion in the field of artificial intelligence will continue, and that more data centers will increase.

So, despite all the concerns we've seen about data center building and the construction sector in the market over the past month or so, I think the reality is that we desperately need more computing capabilities, and more of them will be built over the coming years.

Therefore, I personally believe that much of the selling we have seen in the field of artificial intelligence is unjustified. Finally, by listening to the call, the focus was on the Muse platform, and it appears to be the future focus of Meta's business.

They will continue to improve the models and launch Muse on a wider global scale. Now, let's move on to Stock Unlock, and I'd like to show you Meta's long-term net profit margin.

Let's look at 2016, as Meta's average net profit margin since then has been around 33.2%. Clearly, their net profit margin has decreased as their investments have increased , and now as legal expenses have increased.

However, if Meta manages to restore a net profit margin of 30%, it will generate profits estimated at around US$77 billion, according to its 2026 revenue forecast.

US$77 billion, according to its 2026 revenue forecast. This would make the share price 23 times this year's earnings. If the company manages to increase its revenue by another 15% next year, the share price will reach 20 times its expected earnings.

Personally, I still think this is an excellent price for one of the best companies in the world, which is seeing revenue growth of more than 20% annually. As for the price-to-operating-cash-flow ratio, Meta shares are currently trading at around 13.5 times operating cash flow.

Looking at the bigger picture, this ratio is low compared to the company's historical averages, leading me to believe that the stock is still relatively low even today. Finally, I would like to share my updated analysis of Meta's discounted cash flows following the release of these earnings results.

If Meta continues to grow its operating cash flows at 15% annually, and its shares trade at 14 times operating cash flows, which is well below the company’s long- term average of 16 times, the stock could achieve cumulative growth of around 17 % annually so far.

I do n't believe this analysis of discounted cash flows is exaggerated or unrealistic . All I expect is for Meta's business to continue growing at around 15% annually, and to trade at a price-to- operating cash flow multiple lower than its historically high of 14 times.

If Meta manages to achieve that, I believe the future returns will be very large. Therefore, I still believe that Meta shares are undervalued , but obviously not as much as they were two months ago when the share price was less than $600.

This is the main reason that prompted me to build my position in Meta, because even with conservative discounted cash flow analysis, its shares were delivering annual growth rates of over 20% for the share price.

Overall, I think this quarter was turbulent for Meta, and as I mentioned, I'm surprised the stock price didn't drop after this financial report, but it's good to see revenue growth continuing at over 20% , and Meta expects this growth to continue until the fourth quarter.

Real operating cash flow is also growing excellently, and I believe the company’s underlying profitability is increasing. However, I believe the company's performance will see a decline in share value sometime in 2027 or at least during the next year, and the

So, as a shareholder, I think this is something other shareholders should know, but overall, I am happy with my investment in Meta.

I still believe the stock is undervalued , and I think this financial report was generally good . It wasn't amazing, and as I mentioned, it was full of twists and turns, but I think it was good overall.

As for me, I will continue to hold my shares in Meta, and if its price falls further , I will seek to increase my stake in it.