Meta 3Q26 earnings: From better ads to Muse, Meta’s AI opportunity is broadening

• Meta reported strong 3Q26 revenue growth of 26% year-on-year, although a USD 9.9 billion legal charge weighed on operating income and free cash flow turned negative amid heavy AI infrastructure spending.

• 4Q26 revenue guidance came in above market expectations. Meta also raised its FY26 expense guidance, including the legal charge, and narrowed its capex guidance to USD 135–145 billion, signalling continued heavy investment in AI infrastructure.

• Muse is gaining early traction among consumers and businesses, with potential monetisation through subscriptions, commerce and business services. However, compute constraints, high costs and the time needed to build user trust could slow its progress towards profitability.

• AI continues to strengthen Meta’s core advertising business through improved content recommendations and ad targeting, supporting user engagement, ad conversions and revenue growth.

• We maintain our target price of USD 1,018, implying 57.0% upside from the closing price of USD 648.85 on 22 October 2026. While we remain positive on Meta’s longer-term growth prospects, we recognise that newer AI initiatives such as Muse will take time to scale.

Meta delivered strong revenue growth, but legal charges weighed on earnings

Meta reported 3Q26 revenue of USD 64.6 billion, up 26% year-over-year (YoY) and above consensus estimates of USD 63.3 billion.

Family of Apps advertising revenue rose 26% YoY to USD 63.1 billion, while Family of Apps other revenue increased 59% YoY to USD 1.1 billion, driven largely by growth in WhatsApp paid messaging and subscription revenue. Meanwhile, Reality Labs revenue fell 6% YoY to USD 443 million as lower Quest headset sales more than offset continued strong growth in AI glasses.

Operating income declined 37% YoY to USD 13.0 billion, weighed down by a USD 9.9 billion charge related to an agreement with 52 US state attorneys general to resolve litigation concerning teen mental health and social media. Announced in August 2026, the agreement provides for payments of up to approximately USD 18.59 billion. Excluding the third-quarter charge, operating income would have increased 11% YoY to USD 22.9 billion, suggesting that underlying operating performance remained solid.

Diluted earnings per share (EPS) grew 265% YoY to USD 3.83, above consensus estimates of USD 3.59. This sharp increase came despite the decline in operating income, as the year-ago period was weighed down by a one-off, non-cash income tax charge of USD 15.93 billion related to the One Big Beautiful Bill Act.

Free cash flow (FCF) turned negative at USD 2.1 billion compared with positive FCF of USD 10.6 billion a year earlier, as substantial AI infrastructure spending weighed on cash generation.

Table 1: Meta Q3 earnings

	3Q26	3Q25	Beat/Miss vs Estimate	YoY change
Revenue	64,601	51,242	2.0%	26%
Operating Income	12,988	20,535	-5.3%	-37%
Net Income	9,860	2,709	7.3%	264%
Earnings per Share	3.83	1.05	6.7%	265%
Source: Meta 3Q Press Release, Bloomberg. Data as of 21 October 2026. Figures are in USD millions except percentages and per share amounts.

Looking ahead, Meta expects fourth quarter 2026 revenue to be in the range of USD 73-76 billion. The midpoint of USD 74.5 billion is above consensus estimates of USD 73.6 billion.

For full-year 2026, Meta raised its expense guidance from USD 165–169 billion to USD 175–179 billion, including the USD 9.9 billion legal charge recognised in the third quarter.

The company also narrowed its 2026 capital expenditure (capex) guidance to USD 135–145 billion, from USD 130–145 billion previously, raising the midpoint from USD 137.5 billion to USD 140 billion.

Alongside its earnings announcement, Meta unveiled plans to introduce a new class of non-voting common stock, Class C, effective January 2027. The new shares may be used to raise capital, compensate employees, fund potential acquisitions and serve other general corporate purposes. The move will also facilitate a two-for-one stock split, with shareholders receiving one Class C share for every Class A and Class B share they own.

Muse could create new revenue streams beyond advertising

Early adoption points to strong consumer and business interest

Muse, Meta’s personal AI agent, has made a promising start, with early adoption and engagement suggesting that it could become a meaningful revenue engine for the company. In just six weeks, more than 10 million people in the US and Canada had set up Muse, which ranked first on the App Store almost every day. Around 25% of these users used Muse on any given day, more than twice the initial daily usage rate achieved by Threads and Meta’s estimates for other AI applications, according to CEO Mark Zuckerberg. Retention among early adopters also appears to improve the longer they use the service, an encouraging sign that Muse could become an increasingly established part of users’ daily routines.

Businesses are also showing strong interest in integrating their services with Muse. Meta has received more than 3,000 applications for connectors, more than double the 1,500 applications announced at its Connect event on 23 and 24 September. Almost 30% of Muse users have connected at least one service to the platform. These integrations allow users to access third-party services through Muse, creating a new channel for businesses to reach customers and facilitate transactions. Zuckerberg also highlighted unexpectedly strong activity through payment-related integrations, with Plaid reporting unusually high activity and Meta having to work with Stripe to raise credit limits during Muse’s first week.

Meta is building several routes to monetise Muse

Meta plans to monetise Muse through subscriptions, commerce and enterprise services. For most consumers, Muse is expected to remain free, with Meta developing commerce tools to earn fees from transactions facilitated through the platform. Users who require more advanced models or additional usage will be able to pay for subscriptions, while businesses will have the option to subscribe to features designed to help them grow their operations or deploy Muse for work. Although advertising is not ruled out over the longer term, subscriptions and transaction-related revenue appear to be the near-term priorities.

Muse is also expected to be integrated into Meta’s AI glasses starting next month. This could support demand for the glasses while providing an additional source of recurring subscription revenue from heavier users.

Meta is also working to improve the economics of Reality Labs, which has historically incurred substantial operating losses. The company is pacing its Virtual Reality (VR) investment by reserving new headset launches for major technological breakthroughs and redirecting more resources towards AI. It expects Reality Labs losses to narrow to around USD 15 billion in 2027, from the USD 18-19 billion guided for 2026, and to move towards profitability over time. We view Meta’s shift towards AI, alongside its efforts to contain Reality Labs’ losses, favourably.

Beyond consumer-facing products, Meta is building the Meta Enterprise Platform, led by CJ Desai, to capture high-margin AI inference demand beyond the Muse network. Near-term offerings include model APIs and Muse Code, with a longer-term ambition to develop a network of business AI agents. This would extend Muse's reach beyond individual consumers and create another potential source of revenue growth.

Scaling Muse profitably will take time

Despite its promising early traction, Muse's commercial potential will take time to translate into meaningful profits. The service is currently compute-intensive to operate and capacity constraints could slow its international rollout. Meta aims to improve compute cost efficiency by more than tenfold over the next year through better use of off-peak capacity, more efficient models and inference optimisation. These improvements could help Muse move towards profitability as revenue scales, while further efficiency gains could support attractive margins over time.

Building user trust will be equally important as Muse gains access to more services and personal information. Meta has outlined several security measures, including Sentinel, an independent system-level agent that monitors internet traffic and application actions, and Muse Confidential Virtual Machines, which are designed to encrypt user data so that even Meta cannot view its contents. While these safeguards address important security and privacy concerns, demonstrating their effectiveness and earning users’ trust will take time.

AI continues to strengthen Meta’s core advertising engine

Meta's AI-powered content recommendations continue to drive strong engagement across its platforms. In 3Q26, global time spent per user on Instagram reached an all-time high, growing by double digits YoY, with gains across both Reels and Feed. Facebook Reels also recorded record-high time spent globally, with double-digit YoY growth. Management attributed these gains to more relevant, personalised and timely content recommendations. For example, a new generative retrieval architecture on Facebook increased Reels watch time by 1%, while improvements to Instagram Reels recommendations lifted time spent by more than 4%.

AI is also helping Meta improve advertising effectiveness and deliver better outcomes for advertisers. The launch of Meta Generative Recommender on Facebook Feed, which uses large language models (LLMs) to assess ad content alongside user preferences and predict the most relevant ad for each person, drove a nearly 2% increase in conversions across targeted segments.

Meta is also making campaign management more effective with AI. Advertisers who adopted recommendations from its AI business assistant generated almost 5% more conversions at the same cost per conversion and increased their advertising investment by 9% compared with similar non-adopters. These improvements helped support 26% YoY growth in advertising revenue in 3Q26, with ad impressions up 10% and the average price per ad rising 14%. Stronger engagement and improved ad performance can make Meta’s platforms more valuable to advertisers, encouraging greater spending and supporting higher prices per ad.

Management sees substantial room for further improvements across its advertising systems. We expect advertising to remain Meta’s key cash flow engine, funding its significant AI investments as newer, non-advertising businesses scale.

AI spending remains elevated, but monetisation progress is encouraging

Meta’s shares fell nearly 7% the day after its earnings release, likely reflecting investor concerns over elevated capex, negative FCF and potential shareholder dilution from the newly announced Class C shares. While management did not provide concrete capex projections for 2027, Chief Financial Officer Susan Li signalled that aggressive AI investment would continue into next year to support Meta’s core advertising business and emerging initiatives, including the global expansion of its compute-intensive Muse agent network. The new non-voting Class C shares also provide Meta with another means of raising capital to fund its long-term infrastructure needs. We therefore continue to expect capex to increase in 2027 from 2026 levels, with FCF remaining negative in both years as Meta invests heavily in AI infrastructure.

Nevertheless, we are encouraged by Meta’s progress in monetising its AI investments. Its core advertising business continues to deliver strong growth, supported by AI-driven improvements in user engagement and advertising performance, while Muse offers additional monetisation opportunities through subscriptions, commerce and AI glasses.

However, we expect it will take time for Muse and Meta’s other newer initiatives to scale and make meaningful contributions to earnings. Their profitability will depend on how quickly Meta can improve computing efficiency, build user trust, and drive wider adoption. We therefore maintain our target price of USD 1,018, reflecting our positive longer-term view of Meta’s growth prospects while recognising that returns from its AI investments will take time to materialise. This implies upside potential of 57.0% from its closing price of USD 648.85 on 22 October 2026.

Table 2: Projections for Meta’s earnings

Meta Platforms	2025	2026E	2027E	2028E
Earnings Per Share (EPS)	29.3	31.5	36.5	44.3
Earnings Growth YoY	22.3%	7.4%	15.8%	21.4%
PE Ratio (X)	22.5	20.6	17.8	14.6
Target Price (based on a fair PE of 23X)				1018
Upside Potential				57.0%
Source: Bloomberg Finance L.P., iFAST Estimates. Data as of 22 October 2026

Figure 1: 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.