🥛 Meta will probably miss earnings 🥴

GM. This is Milk Road Stocks, the newsletter that treats the S&P like a season of good TV.

Meta reports earnings tonight after the close - and it’s looking like they’ll miss. But that’s not a reason to write them off (necessarily). Here’s what we’re watching…

First, a quick detour.

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META WILL PROBABLY "MISS" TONIGHT 👀

Meta reports its Q3 earnings after the close tonight, and there's a good chance the first number you see looks ugly.

Blame a legal bill.

In August, Meta settled with 52 state attorneys general who claimed Instagram and Facebook were designed to hook kids, agreeing to pay ~$18B over 10 years.

It expects to book ~$10B of that in tonight's results.

That's why forecasts for EPS (the profit Meta earns per share) are all over the place, anywhere from ~$5.94 to ~$6.76 depending on whose numbers you look at.

A one-off legal bill normally wouldn't scare anyone - but Meta's last report showed why investors are jumpy…

In July, Meta beat on revenue ($60.8B, up 28%) but missed on profit, earning $6.18 a share against ~$7.20 expected.

Its costs jumped 55% (legal charges included), and its free cash flow (the cash left after running the business and paying for data centers and chips) fell 91% to $784M.

The stock dropped 8% the next day. 👇

Source: Milk Road PRO Financial Index

Fast forward to today, and the options market (where traders bet on how far a stock will move) is pricing in a ~10.5% swing in either direction, with the stock sitting ~11% below its Sept 24 high.

Melvin (one of our PRO analysts) boiled the whole debate down back in September.

On Sept 8, he sold half his Meta at ~$615, saying the stock wouldn't go anywhere until Zuckerberg proved all that AI spending could create a brand-new stream of revenue.

The very next day, the stock jumped 6.5% on the launch of Muse (Meta's AI agent that books travel and buys stuff for you), and by Sept 24 it was up ~26% from Melvin's sale price.

(Rough timing. 🤷♂️)

Tonight is the first earnings call where Meta has to answer Melvin's question with its own numbers.

What decides tonight:

1. The ads. Meta guided for $61-64B in Q3 revenue, and analysts expect ~$63.3B (about 24% growth). Ads brought in ~$59.4B of last quarter's $60.8B, so as long as they keep growing, Meta can afford everything else.

2. The bill. Meta's latest forecast puts 2026 expenses at $165-169B. StoneX (which rates the stock a Hold) expects that to rise by at least $10B, and maybe more once Muse's marketing and research costs land.

It also expects Meta to raise its CapEx forecast (spending on data centers and chips), which has already nearly doubled from last year. 👇

Source: Meta earnings releases

Some of that money goes to the neoclouds (companies that rent out AI computing power) that we covered on Monday.

StoneX expects Meta's new CoreWeave and Nebius contracts to squeeze its gross margin (what's left from each sale after the direct costs) into 2027... and Nebius reports tomorrow.

3. Muse's real numbers. Everything we know about Muse so far comes from outside trackers. Morgan Stanley (which just raised its target to $820) says Muse still pulls in ~300K U.S. downloads a day, but only ~20% of new users are still using it two weeks later.

Guggenheim (target $850) points to how fast daily users are growing instead, suggesting Meta's own user and subscriber numbers should settle it.

So…

If ads land near the top of the range and Muse starts proving the growth everyone thinks it’s experiencing, a bigger spending forecast is a lot easier to swallow.

If spending jumps again with nothing new to show for it, we could see echoes of July's 8% drop.

Btw - Melvin is still up ~15% on the half of the META he kept.

To see what he does after the call, try Milk Road PRO for a buck for 7 days.