Meta Stock: Why Shares Dropped 8% After Earnings Beat

TLDR

• Meta reported Q3 earnings with revenue of $51.2 billion (up 26% year-over-year) but earnings per share of $1.05 missed the $6.72 estimate due to a one-time charge.
• Operating margin dropped to 40% from 43% last year as AI-related costs grow faster than sales.
• Meta raised 2025 capital expenditure guidance to $71 billion and warned that 2026 spending will be substantially larger.
• Free cash flow declined 35% despite operational cash flow rising 21%, as AI infrastructure investments drain resources.
• BofA Securities cut Meta’s price target from $900 to $810 while keeping a Buy rating, citing limited earnings growth and free cash flow pressure in 2026.

Meta Platforms reported third-quarter earnings that sent shares down as much as 8% in after-hours trading. The company posted revenue of $51.2 billion for the quarter, beating Wall Street expectations of $49.5 billion. Revenue grew 26% compared to last year.

Meta Platforms, Inc., META

However, earnings per share came in at just $1.05. This badly missed the consensus estimate of $6.72. A large one-time charge during the quarter caused the shortfall.

The company’s operating margin showed concerning trends. It fell to 40% in the third quarter, down from 43% in the same period last year. This decline reflects Meta’s accelerating cost structure outpacing its revenue growth.

Research and development expenses jumped 28% from last year. The increase stems from an aggressive hiring push in Meta’s artificial intelligence research division. Meta raised its 2025 expense guidance as these costs continue to mount.

Capital Expenditure Growth Accelerates

Meta increased its capital expenditure forecast for 2025 to approximately $71 billion. This marks the third upward revision this year, up from the previous estimate of $69 billion. The company also issued a warning for investors looking ahead.

Management stated their current expectation is that capital expenditure dollar growth will be considerably larger in 2026 than 2025. This signals no slowdown in AI infrastructure spending.

The company’s balance sheet reflects these massive investments. In the second quarter, Meta had more debt, tax, and lease liabilities than cash and short-term investments for the first time. This gap widened further in the third quarter.

Free cash flow declined 35% despite operational cash flow rising 21%. The difference comes from the enormous capital expenditures being subtracted. Last week, Meta arranged a $27 billion financing deal for its Hyperion data center with Blue Owl Capital. This joint venture structure keeps the associated debt off Meta’s balance sheet.

Leadership Restructures AI Research

CEO Mark Zuckerberg aims to bring AI capabilities to Meta’s 3.5 billion average daily users across its app family. The company wants to enhance user experiences through products like the Meta AI chatbot. It also hopes to improve ad targeting effectiveness.

The development path has faced challenges. Meta’s Llama 4 language models launched in April to poor reviews. This prompted Zuckerberg to restructure his AI teams.

In June, he began offering top AI researchers large multiyear compensation packages. Some reportedly stretch into nine figures. The effort centered on acquiring 49% of startup Scale AI at a $29 billion valuation. The primary goal was hiring its CEO, Alexandr Wang, to run Meta’s AI research.

Unlike other major AI spenders, all of Meta’s data center investments serve its own needs. The company doesn’t rent out cloud services like Amazon Web Services, Microsoft Azure, or Google Cloud Services do.

BofA Securities lowered its price target on Meta from $900 to $810. The firm maintained a Buy rating on the stock. BofA cited limited earnings per share growth outlook and expected year-over-year free cash flow pressure in 2026.

The firm believes negative expense news is now mostly priced into the stock. It points to upcoming product launches as potential catalysts. These include a new large language model and content creation tools expected to drive engagement and revenue in 2026.

At Meta’s after-hours price of $695, the company traded at 10.5 times estimated 2027 EBITDA. It also traded at 19 times estimated 2027 core business earnings per share. Meta currently trades at $751.67 with a market capitalization reflecting investor concerns about rising costs against future AI returns.

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