Meta Platforms: A Stock to Avoid or a Once-in-a-Decade Buying Opportunity?

Shares of Meta Platforms (NASDAQ: META) have fallen nearly 23% from their peak last August. The culprit: Meta's growing AI spending.

The stock plunged when management warned of a significant increase in capital expenditures (capex) in its third-quarter earnings release last fall. It has continued to languish as management increased its guidance, saying it could spend between $125 billion and $145 billion on building new AI data centers this year.

The question investors now face is whether those fears are overblown and the stock is undervalued, or if AI spending will weigh down profits indefinitely with minimal return on invested capital.

Image source: Getty Images.

The big concern at Meta

Meta is far from the only big tech company spending heavily on AI infrastructure. It's one of four major U.S. hyperscalers building out as much computing capacity as possible. Amazon, Microsoft, and Alphabet are all spending even more on new data centers this year than Meta is. Investors have had mixed reactions to each of those companies' increased spending as well.

But there's a key difference between the other three hyperscalers and Meta. The others all operate public cloud platforms, renting computing capacity to developers. They have huge deals with companies like OpenAI and Anthropic with growing backlogs of contract commitments. That gives them strong revenue visibility and high confidence in their returns on capital investments.

Meta, however, is building computing capacity for itself and only itself. That makes its huge investments significantly riskier, and it has to prove that its AI advancements will deliver financial results commensurate with the spending.

That's a much more uncertain proposition for investors, which is why the stock has traded lower. But if you're willing to take the long-term view, the current market sell-off in Meta stock could be a once-in-a-decade opportunity.

How is AI impacting Meta's financials?

Advertising is at the core of Meta's business. Its revenue growth is driven by two main factors: the engagement it drives in its apps and how well it monetizes that engagement.

Improvements in artificial intelligence (AI) that can increase the relevancy of content can drive both of those factors, and that's exactly what we've seen over recent quarters. Both ad impressions and the price per ad have risen in every quarter over the last two and a half years. Historically, the two metrics moved in opposite directions in the financial highlights of each report

The trend supported 33% year-over-year revenue growth in the most recent quarter. However, the rising costs of AI engineers and infrastructure have pushed operating expenses higher even faster. Operating margin has trended lower since the end of 2024. Still, the company produced a robust 41% operating margin in the most recent quarter.

Meta recently tried to correct for the heavy spending on AI personnel and computing with a round of layoffs. It's planning to cut around 10% of its staff. The move will create a one-time hit but could save the company billions in operating expenses.

Overall, management reiterated expectations that operating income will rise in 2026, even if it experiences some margin compression. In the long run, however, Meta's investments in AI should produce solid improvements in engagement and monetization.

The potential for AI to transform Meta

As the company improves its AI capabilities, it can vastly enhance its ability to keep users engaged and to tailor advertising to each user. That's because large language models are much better at understanding user intent and interest compared to a less sophisticated machine-learning model that merely pattern-matches users to content. That can further improve content recommendations and ad relevancy.

Alphabet, for example, has said that it has seen improvements in Google Search advertising thanks to using its Gemini models to better understand search intent. Granted, that's a much easier problem to solve than developing a complete profile on users based on how they engage with social media content. Ultimately, however, the payoff could be even greater for Meta, as it can narrow the top of the marketing funnel, increasing conversion rates and the price advertisers are willing to pay per ad impression.

The company is also improving its AI-based products for consumers and businesses. CEO Mark Zuckerberg described plans to build AI agents for users and businesses that can help them accomplish their goals throughout the day.

Meta is already building dozens of AI-powered tools for marketers and seeing great engagement. Business AI on WhatsApp facilitates 10 million conversations per week, up from 1 million at the start of the year. More than 8 million advertisers use one of its generative AI creative tools, with AI-generated video ads driving a 3% improvement in ad conversions. That's only going to keep improving as the company's AI models improve.

Management wants to create an AI agent that will create and manage ad campaigns for businesses. That could make it easier for smaller businesses to advertise on its platform, improving its ad pricing as more bidders enter the market. Theoretically, the cost savings of managing a campaign and the higher conversion rate would offset the higher prices of ads on Facebook and Instagram.

Its future looks strong, even as AI costs are rising. Even if operating margin deteriorates slightly over the next few years, the revenue potential should more than offset that, leading to earnings growth close to its revenue growth.

But with a forward price-to-earnings ratio of about 19, the market is pricing Meta as if its revenue growth will slow significantly over the next few years and its margins collapse. That makes it an incredible opportunity right now.

Adam Levy has positions in Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.