Meta Platforms Shares Fall Despite Strong Revenue Growth. Is It Time to Buy the Stock on the Dip?

Shares of Meta Platforms (NASDAQ: META) sank despite the social media company reporting strong third-quarter results that easily topped analyst estimates, as investors fret over its capital expenditures (capex) spending. The company said it needs more computing power for its artificial intelligence (AI) initiatives, and as such raised the low end of its capex budget this year from a prior outlook of $66 billion to $72 billion to a new range of $70 billion to $72 billion. It also expects a big increase next year as well.

The stock is now up just a little over 10% over the past year, erasing solid earlier gains. Let's take a closer look at Meta's Q3 results and future prospects to see if the dip is a buying opportunity.

Strong results

While the market reaction may not seem like it, Meta turned in very strong Q3 results. Revenue for the quarter surged 26% year over year to $51.24 billion, which was an acceleration from the 22% revenue growth it saw in Q2. Adjusted EPS, meanwhile, climbed by 20% to $7.25. Analysts were only looking for revenue of $49.4 billion and adjusted EPS of $6.69, as compiled by LSEG.

Advertising revenue climbed 26%, coming in at $50.1 billion. Revenue at Reality Labs, which is home to Meta's metaverse efforts and its augmented reality headsets and smart glasses, skyrocketed 74% to $470 million. Operating income from its social media apps increased by 15% to $25 billion, while Reality Labs recorded a loss of $4.4 billion.

Meta's advertising growth was led by an 14% increase in ad impressions and a 10% jump in average price per ad. The company's AI efforts have led to better content recommendations, which is leading to users spending more time on its sites. This is resulting in more ad impressions. It also pointed to its new Vibes AI creation tool as helping increase user growth and retention.

Meanwhile, AI is also helping improve ad campaigns and targeting, which is improving ad performance, and thus pricing. Meta said it added more generative AI features in the quarter that make it easier for advertiser to run better campaigns.

Meta also continues to grow its number of users. Family daily active people (DAP), a measurement of registered users who log in to one of Meta's apps daily, climbed by 8% year over year to 3.54 billion. That was also above analyst expectations for DAP of 3.5 billion.

Looking ahead, Meta is forecasting Q4 revenue to be between $56 billion to $59 billion, which equates to growth of between 16% to 22% year over year. The company said it expects strong growth in 2026, although that will lead to much larger capex spending next year compared to this year.

Image source: Getty Images.

Is Meta stock still a buy?

Investors seem to worry more about Meta's spending more than some other big tech companies, which probably has to do with all the money it's spent on the metaverse without much to show for it. However, its AI initiatives have been leading to strong revenue growth in its ad business, so spending in this area appears to be paying off.

The company also has the cash flow to make these investments, having produced $31.3 billion in free cash flow through the first nine months of the year, despite heavy capex spending.

At the same time, Meta is still in the early innings of serving ads on its WhatsApp and Threads. It said it is just starting to gradually roll out ads within WhatsApp and expects to complete its rollout next year. Meanwhile, for Threads, it is working to optimize ad formats and performance before it increases its ad supply. These efforts should be a nice growth driver in the coming years.

Looking at valuation, Meta stock trades at a forward price-to-earnings (P/E) ratio of around 22 times 2026 analyst estimates, which is the cheapest valuation among all the "Magnificent Seven" stocks. Between its growth opportunities and valuation, I'd be a buyer on the dip.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.