The impact of U.S. tax reform and the cost of the AI arms race, Meta's quarterly profit plummets by 83%.
On October 29, Meta released its third-quarter financial report, with revenue of $51.24 billion, a year-on-year increase of 26%. Although this seems strong, net profit plummeted from $15.69 billion in the same period last year to $2.71 billion, a decline of 83%.
The main culprit for this dramatic decline is the one-time non-cash tax expense of $15.93 billion brought about by the U.S. tax reform law, the &#34;Inflation Reduction Act,&#34; which pushed the effective tax rate from 12% in the same period last year to 87%. Key points are as follows:
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<li>Financial Performance: Q3 revenue of $51.24 billion, a year-on-year increase of 26%, exceeding market expectations; however, the reported EPS was only $1.05, which was $5.63 lower than market expectations. Net profit of $2.71 billion, a year-on-year plummet of 83%, mainly due to the one-time non-cash tax expense of $15.93 billion from tax reform. Excluding this impact, EPS would be $7.25, and net profit would be $18.64 billion.</li>
<li>Users and Advertising Business: Daily active users (DAU) reached 3.54 billion, an 8% year-on-year increase; ad impressions grew by 14%, and the average ad price rose by 10%, with strong growth in the advertising business.</li>
<li>Significant Cost Pressure: Total costs and expenses in Q3 were $30.71 billion, a year-on-year increase of 32%, outpacing revenue growth; capital expenditures reached $19.37 billion, with the full-year forecast raised to $70-72 billion.</li>
<li>AI Investment Upgrade: The company clearly stated that computing demand continues to expand significantly, with absolute capital expenditure growth in 2026 expected to be significantly greater than in 2025, and total expense growth will also accelerate, mainly driven by infrastructure costs (including cloud services and depreciation).</li>
<li>Increased Regulatory Risks: The EU may impose significant negative impacts on the advertising business as early as this quarter; multiple lawsuits related to minors in the U.S. are scheduled for trial in 2026, which could lead to significant losses.</li>
<li>Future Focus: Q4 revenue guidance is $56-59 billion, in line with expectations but showing slower growth; expenses and capital expenditures will increase significantly in 2026, putting pressure on profit margins; Reality Labs revenue is expected to decline year-on-year in Q4 due to product cycle.</li>
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After the earnings report was released, Meta's stock plummeted over 8% in after-hours trading.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/aa308cad-7572-44cb-8c3f-d2a105263bf4.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/aa308cad-7572-44cb-8c3f-d2a105263bf4.png"/> (Meta fell 8.26% in after-hours trading)
<h2>The advertising engine remains strong, but ceilings are becoming apparent</h2>
Meta's core advertising business data remains impressive.
In the third quarter, ad impressions grew by 14%, and the average price per ad increased by 10%, both driving healthy growth in advertising revenue. The 3.54 billion daily active users, an 8% year-on-year increase, indicates that the user base is still expanding.
However, the shadow of EU regulation is turning into a substantial threat. Meta's CFO publicly stated:
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It cannot be ruled out that the European Commission may impose further changes on the company's 'less personalized advertising' product as early as this quarter, which could have a significant negative impact on European revenue.
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Given that Europe is an important market for Meta, if this risk materializes, it will directly impact growth expectations.
<h2>AI Arms Race: From Investment to Gambling</h2>
In the third quarter, capital expenditures reached $19.37 billion, and the full-year guidance was raised from the previous $66-72 billion to $70-72 billion. But this is not the end. The CFO clearly warned:
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The absolute growth of capital expenditures in 2026 will be significantly greater than in 2025.
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If capital expenditures reach the upper limit of $72 billion in 2025, this means that 2026 could easily exceed $80-85 billion or even higher.
At the same time, the growth rate of total expenses in 2026 will significantly outpace the 22-24% of 2025, primarily driven by infrastructure costs (cloud service fees and equipment depreciation) and AI talent compensation. Management admitted:
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As we begin planning for next year, the expansion of demand is clearly exceeding last quarter's expectations
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Meta's quarterly profit plummets 83%, after-hours trading drops over 8% | Earnings report insights