Investors had much to celebrate when Meta Platforms (META 0.53%) reported its first-quarter earnings in late April. Revenue grew by 33% to $56.3 billion, operating margins held at 41%, and the company's earnings per share topped Wall Street's number. The social media giant is firing on all cylinders.
Then why did Wall Street sell the stock? The stock plummeted after earnings. Shares have rebounded a bit since then, but Meta Platforms still sits far below its 52-week high of $796 per share.
The answer is simple: The market has grown wary, perhaps outright fearful, of Meta's relentless spending on artificial intelligence (AI). Here's whether investors should be afraid to buy the stock today.
Image source: The Motley Fool.
Meta could spend over half its revenue on AI this year
Meta increased its planned 2026 capital expenditures by $10 billion to a range of $125 billion to $145 billion, up from $115 billion to $135 billion. Analysts estimate that Meta will earn approximately $253 billion in revenue this fiscal year. So, yes, the company could spend more than half its top line on expenditures primarily aimed at artificial intelligence.
CEO Mark Zuckerberg clearly feels very strongly about AI's importance to Meta's business model and future. But feeling strongly about something only gets you so far. Meta has been pumping billions of dollars into Reality Labs for several years now, and at steep losses, including another $4 billion lost in the first quarter.
That's why Wall Street's concerns are reasonable. All of this AI spending can be worthwhile, but AI must ultimately justify those investments with a significant return on that money.
NASDAQ: META
Key Data Points
AI is helping Meta's core business put up huge numbers
The immediate returns are coming from within the core advertising business, where AI is helping Meta continually serve more ads and monetize them better. AI is helping automate ads, match ads to their ideal audience, and recommend content to social media users. Meta's ad impression growth of 19% and price-per-ad growth of 12% in Q1 were notably higher than the 5% and 10% growth in Q1 2025.
Meta still needs more time to monetize its consumer-facing AI products. That would include its version of ChatGPT, the Meta Quest headset brand, and its AI smart glasses. It's still too early to know what those will ultimately become, but Mark Zuckerberg has always swung for home runs and continues to push new product ideas.
If Meta were a consensus winner, the stock would probably be far more expensive right now. Yes, the spending is massive, and it's still a risk moving forward. But with Meta stock trading at less than 19 times its 2026 earnings estimates, the valuation seems low enough to take that risk. Even with the spending concerns, Wall Street analysts currently see Meta growing earnings by an average of 19% annually over the next three to five years.
When you look at the big picture, there's a good chance that Meta's top and bottom lines will be higher in five to 10 years than they are now. The stock should be, too.
