Prediction: Meta Platforms Stock Will Drop After Earnings, and That Could Be an Incredible Buying Opportunity

Meta Platforms (NASDAQ: META) is expected to deliver its third-quarter report at the end of the month, and that event could lead to a big drop in the stock. Shares have fallen by 7.95% or more in the trading sessions immediately following three of Meta's last four earnings releases. Those declines have largely been credited to the market's response to Meta's increasing capital expenditures, which have weighed on free cash flow and earnings. Meanwhile, however, its revenue continues to climb quarter after quarter.

That pattern could continue with Meta's next earnings report, and the company's outlook for both capital expenditures and revenue could play a role. That's all due to the success of Meta's newest product: Muse.

Image source: The Motley Fool.

Muse is a double-edged sword

Muse, an agentic AI app, has rocketed to the top of the app store charts, surpassing 3 million weekly users and 5 million downloads in about three weeks after its launch. With Meta's distribution capabilities and the ability to promote the product to its 3.6 billion daily active users across Instagram, Facebook, and its messaging apps, that number has a lot of room to grow.

Meta offers a generous free tier for Muse as well as a couple of paid tiers for power users. Management expects to eventually generate the bulk of Muse revenue from fees on the transactions its agents facilitate. With that in mind, there are two key things to recognize about this agentic AI. First, it requires a lot of compute power to run. Second, Meta is not yet generating much revenue from running it.

If Muse is the success all the early reports suggest it is, that means Meta will likely increase its data center capital expenditures significantly, and its revenue outlook could disappoint. Analysts had previously grown optimistic about the potential revenues and profits Meta might generate by joining its fellow hyperscalers in renting out excess compute capacity to third parties. Now, Wells Fargo analyst Ken Gawrelski points out that a rapidly growing Muse user base could compel Meta to pause those plans and reserve its compute for its in-house needs.

That could all combine to send the stock lower as investors worry about Meta potentially overbuilding its infrastructure for artificial intelligence.

Meta requires long-term confidence

Gawrelski believes 2027 will be the low point in earnings for Meta as the company will invest even more heavily in AI infrastructure, but high-margin AI revenue won't start accumulating until 2028. He also believes analysts are overestimating Meta's near-term results while underestimating its long-term potential. Likewise, Citi analyst Ronald Josey is modeling for $27 billion in revenue from Muse by 2030, $23 billion stemming from transactions. That would be equal to around 12% of Meta's revenue from the last 12 months.

Few companies are better positioned to benefit from advanced artificial intelligence capabilities than Meta. Agentic and generative AI lower the barriers for small businesses to advertise on its portfolio of apps. CEO Mark Zuckerberg's vision of an AI agent that can start with a business's budget and a goal, and take care of everything else, from designing ads to testing them across Meta's platform, is nearly here.

What's more, generative AI can increase the amount of content on Meta's platforms by enabling users to make more interesting images and videos to share. Large language models are getting better at understanding Meta's users, which means its targeting for both user-generated content and advertisements should improve. Now, it has a popular consumer-facing AI agent.

The effects of Meta's AI investments are already evident in its top-line growth numbers. It's the bottom line and free cash flow that concern most investors. Accelerating depreciation expenses will weigh on its operating income going forward, but strong revenue growth over the long run will outweigh the higher expenses.

While I think it's likely that Meta stock will fall after it reports Q3 earnings this month, I also don't think investors need to wait for a better price. The stock trades at just 23 times forward expected earnings. For a company capable of growing as quickly as Meta is over the next few years, especially with the help of a successful Muse launch, that looks like a great price at which to buy. If the stock does indeed drop after earnings, it'll likely be worth it for patient long-term investors to buy more.

Wells Fargo is an advertising partner of Motley Fool Money. Citigroup is an advertising partner of Motley Fool Money. Adam Levy has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.