There's a lot in Meta Platforms' (META +2.48%) recent financial updates for the bulls to like. The social media giant is generating incredible top-line momentum. In addition, management guided for even faster growth in Q1.
But here's the issue: Meta's artificial intelligence (AI) growth initiatives are slowing its earnings growth. And it seems to be worrying investors. The stock is down about 10% year to date.
Could the stock go even lower this year? Given the staggering shift in the company's cost structure, possibly.
Here is a closer look at why the stock's recent pullback might just be the beginning.
Image source: Getty Images.
The top-line distraction
To be fair to the bulls, Meta's revenue trajectory is undeniably strong. The company generated $59.9 billion in fourth-quarter revenue, representing a 24% year-over-year increase.
And management expects this momentum to accelerate.
For the first quarter of 2026, Meta guided for revenue between $53.5 billion and $56.5 billion. At the midpoint, that forecast implies a year-over-year growth rate approaching 30%. With 3.58 billion daily active users across its family of apps (Facebook, WhatsApp, Instagram, Threads, and Messenger), the tech company is successfully flexing its pricing power and driving higher ad impressions.
But great top-line growth doesn't automatically translate to a great investment.
A structural shift in costs
The core issue dragging on the stock is the sheer magnitude of Meta's spending. The company is actively transitioning away from its historically asset-light software roots into a more capital-intensive business.
This pivot is already showing up in the numbers.
Meta's fourth-quarter total expenses surged 40% year over year to $35.1 billion. That dramatic increase in costs is weighing on its operating margin (fourth-quarter operating margin was 41%, down from 48% in the year-ago period), causing a significant slowdown in earnings-per-share growth. Meta's fourth-quarter earnings per share increased 11% year over year. This is a significant slowdown from the prior quarter, when adjusting for a one-time item that affected the period; adjusted earnings per share in Q3 rose 20% year over year.
And the pressure is only going to get worse. Management guided for full-year 2026 expenses to land between $162 billion and $169 billion -- up from about $118 billion in 2025.
"The majority of expense growth will be driven by infrastructure costs, including third-party cloud spend, higher depreciation, and higher infrastructure operating expenses," management explained during the company's fourth-quarter earnings call.
Even more staggering are the company's capital expenditures to support its planned infrastructure build-out. Management forecast 2026 capital expenditures to be between $115 billion and $135 billion. The midpoint of this guidance range would be about triple the company's 2024 capital expenditures and far above 2025 levels, too.
As these capital expenditures convert into significant depreciation charges on the income statement, profitability will face severe headwinds.
Meta is no longer just dealing with the uncertainty introduced by the AI era; it is also facing negative earnings tailwinds from its own spending plans.
NASDAQ: META
Key Data Points
Valuation risk
This brings us to the stock's valuation. As of this writing, Meta trades at a price-to-earnings ratio of about 25.
While that multiple might look reasonable for a company posting 24% revenue growth, it leaves very little cushion for a business undergoing massive margin compression and transitioning toward a capital-intensive operation. If earnings growth continues to stall under the weight of infrastructure costs and rising depreciation, the market will likely demand a lower premium.
It is entirely plausible that investors decide a heavily capital-intensive business model deserves a lower valuation multiple. If the market rerates the stock to a price-to-earnings ratio of 20 to account for increased uncertainty around big spending and the earnings pressure we're already seeing, shares could fall significantly from here.
Of course, there is no way to know exactly where the bottom is. Meta CEO Mark Zuckerberg has successfully navigated major platform transitions before, and over the long haul, my guess is that the stock works out decently well.
But the current cost pressures are a major concern.
Until the tech giant can prove that its staggering artificial intelligence investments will generate an attractive return on invested capital, I think investors should view this as a higher-risk play. For now, it makes sense to keep any position in the stock small.
