Meta's Stock Dropped, but Its AI Strategy May Be Stronger Than Ever

Coming into Meta Platforms' (NASDAQ: META) third-quarter earnings report on Wednesday, investors were prepared for more spending on AI, but Meta's plans for 2026 seemed to be too much for them to stomach.

The social media giant didn't give a specific number, but stressed its need for more infrastructure capacity, saying, "As we have begun to plan for next year, it has become clear that our compute needs have continued to expand meaningfully, including versus our expectations last quarter." Management added that capital expenditures "will be notably larger in 2026 than 2025."

That news, along with a deferred tax valuation adjustment that crushed generally accepted accounting principles (GAAP) earnings, sent the stock down 6% after hours.

The sell-off was a bit surprising, as investors seemed to have accepted that tech giants like Meta are going to spend massive amounts to achieve their AI goals. "Magnificent Seven" stocks continue to move higher, with most of the sector hitting record highs.

The AI spending announcement also came as the company delivered another smashing earnings report. Let's take a look at the latest quarterly numbers before discussing the implications of its ramped-up AI spending.

Image source: Getty Images.

Meta's growth accelerates again

Revenue in the third quarter surged by 26%, its fastest growth in several quarters, to $51.2 billion, topping analyst expectations at $49.4 billion.

Key metrics all show the core social media business continuing to deliver strong growth. Active people across its family of apps were up 8% to 3.54 billion from a year ago, while ad impressions rose 14% and price per ad was up 10%. Both of those trends supported its strong revenue growth, which came almost entirely from its advertising business.

Operating margin narrowed from 43% to 40% as the company stepped up its investments in research and development, as it continued to push into AI. Backing out a one-time, non-cash charge of $15.93 billion changes in the tax code from the Big Beautiful Bill, its earnings per share increased from $6.03 to $7.25, ahead of the consensus at $6.71.

Meta's big AI plans

If it seems like Wall Street might be more skeptical of Meta's AI plans than it is of its big tech peers, there's a good reason for that. Unlike Microsoft, Amazon, and Alphabet, Meta doesn't have a cloud computing business. For the so-called big three cloud-computing companies, much of their capital expenditures come from expanding capacity to serve customers, building out their own AI capabilities along the way.

Meta raised its capital expenditure forecast from $66 billion to $72 billion to $70 billion to $72 billion, and that's now expected to grow substantially next year.

CEO Mark Zuckerberg talked up the company's efforts in superintelligence, or artificial intelligence that surpasses human intelligence, in addition to powering its advertising and recommendation engine on its apps.

As Zuckerberg sees it, the company is positioning itself to capitalize on the transformative innovations to come from AI. He said, "The upside is extremely high for both our existing apps and new products and businesses that are becoming possible to build."

Meta continues to lose an incredible amount of money on Reality Labs, the division committed to developing next-gen technologies like AI. Through the first three quarters, Meta has reported an operating loss of $13.2 billion from Reality Labs, but the company can afford to do that as it made more than five times that in operating profit from its apps.

Zuckerberg also acknowledged the risk of being overambitious in its buildout, saying in the worst case, it would slow down building new infrastructure and grow into what it's built if progress to superintelligence takes longer than expected.

Overall, Meta is still in control of its spending, and the roadmap is clear. While investors never like to see expenses jump, it's a reasonable choice to make. We should get a forecast for 2026 capital expenditures from Meta when it reports fourth-quarter earnings in a few months.

Jeremy Bowman has positions in Amazon and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.