Is Meta Platforms Stock a Buy on the Dip as Revenue Surges?

For the second straight time this year, Meta Platforms (NASDAQ: META) stock was slammed after the social media giant reported its quarterly earnings. The culprit this time appears to be a combination of missing earnings per share (EPS) expectations (which is not really the case) and, once again, an increase in its capital expenditures (capex) budget.

Capex continues to be a big focus for investors, as they worry about the returns large tech companies will get from their massive spending. Meta now expects 2026 capex of between $130 billion and $145 billion, upping the lower range of its prior $125 billion to $145 billion guidance.

The company declined to give a 2027 capex forecast when asked but said it plans to maximize capacity this year and next. This likely means it is going higher next year. Does the market's recent worries about Meta's spending spell opportunity for long-term-minded investors?

Strong revenue growth continues

Despite the sell-off in the stock, Meta's core business continues to perform very well. Its Q2 revenue jumped 28% year over year to $60.8 billion. EPS fell by 13% to $6.18. Analysts were looking for an EPS of $7.22 on revenue of $60.17 billion, as compiled by LSEG.

Notably, Meta's reported EPS included $2.4 billion in legal costs and nearly $1.2 billion in severance costs, which are typically excluded from adjusted EPS. Excluding those charges and applying the company's effective tax rate, its adjusted EPS would have been $7.35, topping analyst estimates.

Meta's advertising revenue climbed 27% to $59.4 billion, while other revenue nearly doubled to $1 billion. Revenue at Reality Labs, which is home to Meta's metaverse and its augmented reality headsets and smart glasses, rose 16% year over year to $431 million. Operating income from its social media apps fell by 1% to $23.4 billion, while Reality Labs posted a loss of $4.6 billion versus $4.5 billion a year ago. Excluding charges, overall operating income would have risen 9%.

Meta's advertising growth was fueled by a 14% rise in ad impressions and a 12% increase in average ad price. The growth is being driven by the use of AI within its ad system, as its Meta Generative Recommender improves its understanding of ad content and better predicts user preferences. This leads to more precise ad matching and better conversion. Over 9 million small businesses have adopted at least one generative AI creative tool, while its AI-powered Advantage+ end-to-end solution has grown to an annual recurring revenue run rate of over $75 billion.

Despite its huge user base, Meta also continues to see solid growth in this area. Family Daily Active People (DAP), a metric measuring registered users who log in to one of Meta's apps daily, rose 3.5% year over year to 3.6 billion.

While Meta is seeing strong revenue growth, its expenses rose even faster. Overall expenses surged 55% to $42 billion. Excluding charges, expenses would have been up 42%. Despite heavy capex and rising expenses, Meta still managed to generate $784 million in free cash flow. It has also generated $13.2 billion in free cash flow through the first half of the year.

Looking ahead, Meta forecasts Q3 revenue between $61 billion and $64 billion, representing year-over-year growth of 19% to 25%. Analysts were looking for Q3 revenue of $63.2 billion.

Image source: The Motley Fool.

Is it time to buy the dip?

Don't let the fall in the stock price and headline EPS numbers fool you -- Meta turned in a solid quarter. The company continues to use AI to drive strong growth in its core business, demonstrating that its AI spending is paying off. If a company can get a strong return on its investments, they should make them, and that is what Meta is doing with AI. Meanwhile, a move to cloud computing would give Meta added flexibility in compute power.

One frustrating thing about Meta is that Reality Labs continues to burn cash, with no clear path to when these investments will ever pay off. Hopefully, with the closure of its virtual reality metaverse Horizon Worlds in June, these losses will become much smaller in the future.

Following its sell-off, the stock trades at a forward price-to-earnings (P/E) ratio of just above 14 based on 2027 analyst estimates. Meta is not perfect, but given its growth and valuation, this is a top AI stock to buy on this dip.

Geoffrey Seiler has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool recommends London Stock Exchange Group Plc. The Motley Fool has a disclosure policy.