Meta Stock: AI Spending Surge Pressures Margins Despite Revenue Beat

TLDR

• Meta’s Q3 revenue hit $51.2 billion (up 26%) but EPS of $1.05 badly missed the $6.72 estimate due to a one-time charge.
• Operating margin contracted to 40% from 43% as AI costs accelerate faster than revenue growth.
• The company raised 2025 capex guidance to $71 billion and expects even larger spending increases in 2026.
• Free cash flow dropped 35% while operational cash flow rose 21%, showing the strain of AI infrastructure investments.
• BofA Securities downgraded Meta’s price target to $810 from $900, citing earnings growth and cash flow concerns.

Meta Platforms delivered mixed third-quarter results that pushed shares down 8% in after-hours trading. The social media giant reported revenue of $51.2 billion, surpassing Wall Street’s $49.5 billion estimate. Year-over-year revenue climbed 26%.

Meta Platforms, Inc., META

Earnings per share came in at $1.05, missing the consensus forecast of $6.72. A large one-time charge caused the significant shortfall.

The company’s operating margin fell to 40% from 43% in the prior year period. This compression signals that costs are growing faster than sales. Research and development expenses jumped 28% year-over-year, driven by aggressive hiring in Meta’s AI research division.

Capital Spending Plans Intensify

Meta increased its 2025 capital expenditure outlook to roughly $71 billion. This represents the third upward revision this year from the previous $69 billion estimate.

Management warned that 2026 capex dollar growth will be substantially larger than 2025. The AI infrastructure buildout shows no signs of slowing down. Free cash flow declined 35% even as operational cash flow increased 21%. The gap comes from massive capital expenditures being deducted.

Meta’s balance sheet now reflects these heavy investments. The company carries more debt, tax, and lease liabilities than cash and short-term investments. This shift started in Q2 and deepened in Q3.

Last week, Meta structured a $27 billion financing deal with Blue Owl Capital for its Hyperion data center. The joint venture keeps related debt off Meta’s books.

AI Strategy Drives Research Overhaul

CEO Mark Zuckerberg wants to deliver AI features to Meta’s 3.5 billion daily active users. The company plans to enhance experiences through tools like the Meta AI chatbot while improving ad targeting.

Meta’s Llama 4 language models launched in April to negative reviews. This prompted a restructuring of the AI teams. In June, Zuckerberg started offering top AI researchers compensation packages reportedly reaching nine figures.

The crown jewel of this recruitment push was acquiring 49% of startup Scale AI at a $29 billion valuation. The main objective was bringing on CEO Alexandr Wang to lead Meta’s AI research efforts.

Analyst Outlook Adjusts Lower

BofA Securities cut Meta’s price target from $900 to $810 while keeping a Buy rating. The firm pointed to limited EPS growth and free cash flow pressure expected in 2026.

BofA believes most negative expense news is now priced into shares. The firm sees potential catalysts in upcoming product releases, including a new large language model and content creation tools.

At the after-hours price of $695, Meta traded at 10.5 times estimated 2027 EBITDA and 19 times estimated 2027 core business EPS. The stock currently trades at $751.67 as investors weigh rising AI costs against future returns.

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