Meta and Microsoft Deliver, and We're Keeping Firm on Our Targets
Capital spending comments should lift the Portfolio’s AI and data center chip holdings.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
Last night three of the Portfolio’s holdings – Meta META, Microsoft MSFT, and Qualcomm QCOM – all reported better-than-expected quarterly earnings and favorable guidance. Reports from Meta and Microsoft also confirmed the rising adoption of artificial intelligence and cloud. That trend is why we've remained owners of both stocks, and why we picked up more META and Marvell MRVL shares in mid-April.
In reiterating its capital spending plans for this year, Microsoft quelled concerns that have weighed on the shares and others, including Nvidia NVDA and Marvell. But it was Meta’s lifting its 2025 capital spending plans to $64 billion-$72 billion from $60 billion-$65 billion that made headlines. Concerns about chip demand should be lifted and our shares of NVDA and MRVL boosted as we hear this combination of comments from Meta and Microsoft, as well as Alphabet GOOGL reiterating its 2025 capital expenditure plans last week and Amazon’s AMZN recent comments that it sees no slowdown in data center demand. As we think about those capital spending comments, the management teams must see the signals we see each week about AI adoption, and that adds another layer of support for our positions in ServiceNow NOW and Elastic ESTC.
We’ll give our take on Qualcomm’s quarterly results and connect those dots in a separate alert to members. In terms of our price targets for Meta and Microsoft, while others scramble to lift theirs, we’ll maintain ours at $725 and $480, even though we are likely to see sharp moves higher in both of those shares. Yes, the results were far better than expected, but both also had a fair amount of short interest per data from Nadaq which is likely to exacerbate their moves today and tomorrow as those short positions are covered. Per Nasdaq, just over 51 million MSFT shares were short as of April 15, and for META that figure was 31.5 million.
Now let’s dig a little deeper into their quarterly results.
Meta
Meta reported quarterly earnings per share of $6.43, $1.20 better than the market consensus. Revenue climbed 16.1% year over year to $42.31 billion, outstripping the $41.34 billion consensus. One of our points about Meta is the improving margin profile as the company reaps the benefit of using AI to drive productivity and pricing. We saw that again in the March quarter as the operating margin clocked in at 41% compared to 38% in the year-ago quarter.
As much as folks may be focused on Meta increasing its capital spending, to us the incrementally lower expectation for its 2025 expense guidance to $113-$118 billion from the prior guidance of $114-$119 billion, suggests there we are likely to see even more operating leverage in the coming quarters. Spending discipline is the name of the game, and Meta telegraphed that as well with its increased capital spending commenting the majority of that spending will be directed to the core business, which is the bread-and-butter Advertising business (98% of revenue and all of Meta’s operating profits) not Reality Labs.
Meta continued to grow its daily active user base, hitting 3.43 billion in March, up 6% year over year, but it also shared that one billion monthly active users are using Meta AI. That should bring the company an ample amount of data to train and refine its models, keeping its offering competitive. What we like about this is the learning that Meta gathers that it can apply to its advertising business, something we also see at Google. It stands to reason that as Meta improves its AI and more of the user base uses it, the sharper it will become in matching advertisers with targeted users. As that happens, we are likely to see further improvement in the average price per ad, which rose 10% year over year in the March quarter.
We see that as a win-win for Meta’s advertising business, one that is already benefiting from the shift to digital advertising and one that should become more profitable incremental benefits of pricing and productivity are felt. It’s that improvement in profitability and cash flow that is allowing Meta to invest to the degree it is. We will want to be owners of META shares to capture the margin benefits as it reaps the reward of those investments. Our thinking is that as Wall Street sees the step up in margins, it will need to revise its EPS expectations accordingly.
Near-term, given some of the economic data pieces we received earlier this week and the potential impact of tariffs, we will want to track corporate discretionary spending, including advertising spend. Our thinking is that any such spending cuts are likely to lean more toward traditional media (radio, TV, print) than digital but we could see META shares bob and weave based on spending cut headlines. At just under 3% of the Portfolio’s assets, we have some room to pick up more META shares, but odds are we will need to be opportunistic.
Microsoft
Microsoft delivered consensus-topping results for both its top- and bottom-lines for its March quarter and its implied guidance tallies to $73.15 billion-$74.25 billion, nicely ahead of the $72.23 billion market forecast. March quarter EPS came in at $3.46, $0.24 ahead of expectations on revenue that rose 13.3% year over year to $70.07 billion, nicely ahead of the $68.44 billion consensus.
We can tie the upside surprise in the March quarter as well as the sequential improvement for the current one back to Microsoft’s Azure and other cloud services business. While Microsoft has exposure across multiple markets including PC, gaming, and others, the is increasingly driven by its service segment (78% of sales, 65% gross margins) than its product segment (23% of sales, 78% gross margins). In recent quarters that business has been capacity-constrained, but as that has been addressed, we are seeing the expected re-acceleration emerge, one that Microsoft management telegraphed.
In the March quarter that revenue rose 33%, topping Microsoft’s guidance, and re-accelerating from 31% in the December quarter. For the current quarter, management sees that business up 34%-35% in constant currency. But on the earnings call management noted that given the level of demand it is seeing compared to its ability to ramp AI capacity, it now sees capacity constraints lingering into the September quarter. That helps frame Microsoft reiterating its capital spending plans for the second half of 2025.
On the hardware front, the company shared that its Windows original equipment manufacturing and devices revenue increased 3% year-over-year, ahead of expectations due to the likely pull forward in demand ahead of April tariffs. With tariff uncertainty remaining for PCs, smartphones, and other devices, Microsoft widened its More Personal Computing segment revenue guidance more so than usual. Baking it what it is currently known on the tariff front, Microsoft sees that revenue coming in between $12.35 billion-$12.85 billion in the current quarter vs. $13.4 billion in the March quarter. While down sequentially, it’s also a larger drop against the $15.9 billion posted in the June 2024 quarter. When we look at Qualcomm QCOM shares under pressure it’s that outlook along with the larger tariff uncertainty on other connected devices that is weighing on the shares. We’ll have more on that in our standalone QCOM note later this morning.
When we stand back and look at Microsoft’s March quarter and its guidance, the message to walk away with is the strength in AI and cloud that permeates across multiple business lines and is still somewhat capacity-constrained, is strong enough to more than offset the near-term uncertainty in the company’s hardware business. The reaction we’re seeing in the shares is partly one of “better than feared” even as the market resets tariff-related expectations. Much like our thoughts above on Meta, we should see Microsoft’s margins rebound as it moves from ramping up AI infrastructure to monetizing it. On the tariff front, we’ll wait and see what comes next, but we believe any announced tariff is likely to be less than the 145% one Trump slapped on imports from China. But until that level is announced it’s going to remain a layer of uncertainty.
With that in mind, we’ll focus on where Microsoft is likely to be 12 months from now, and we see it even better positioned as AI adoption across the enterprise continues. Catalysts that will drive MSFT shares toward our $480 stock price include further confirmation that Azure is monetizing Microsoft’s spending and driving margins higher, and clarity on tariffs.
At the time of publication, the Pro Portfolio was long META, MSFT, QCOM, MRVL, NVDA, GOOGL, AMZN, ESTC and NOW.
