Meta Stock Drops 15% Despite Strong Earnings Beat – Time To Buy?

TLDR

• Meta reported Q3 revenue of $51.2 billion, up 26% year-over-year, beating analyst estimates by nearly $2 billion
• The stock dropped 15% after management announced plans to increase capital expenditures to $70-72 billion in 2025
• Management expects 2026 capital spending to be “notably larger” than 2025, potentially exceeding $100 billion
• Free cash flow declined to $10.6 billion from $15.5 billion year-over-year as infrastructure spending increased
• Ad impressions grew 14% while average price per ad rose 10%, with daily active users up 8%

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The social media giant reported third-quarter earnings per share of $7.25, easily topping analyst estimates of $6.69. Revenue hit $51.2 billion, beating expectations by nearly $2 billion.

Despite these results, shares plunged 15% in the week following the October 29 earnings release. The stock dropped from around $750 per share to $635 at the time of writing.

Meta Platforms, Inc., META

The disconnect between strong performance and stock price comes down to one thing: spending. CEO Mark Zuckerberg announced plans to dramatically increase capital expenditures on AI infrastructure.

Meta now expects to spend between $70 billion and $72 billion on capital expenditures in 2025. CFO Susan Li warned that 2026 spending would be “notably larger.”

This guidance suggests capital expenditures could easily exceed $100 billion next year. The company plans to pour this money into computing power to support AI-powered features across its platforms.

Total expenses for 2025 are expected to land between $116 billion and $118 billion. Management indicated that expense growth would accelerate at a faster percentage rate in 2026.

The market’s reaction shows investors aren’t sold on the payoff. Questions remain about whether these massive investments will generate returns that justify the spending.

Revenue Growth Accelerates

Meta’s third-quarter revenue growth of 26% year-over-year marked an acceleration from the low-20s growth rate in the prior quarter. The company’s advertising business continues to perform well across its family of apps.

Ad impressions across Facebook, Instagram, WhatsApp, Messenger, and Threads increased 14% year-over-year. The average price per ad climbed 10%.

Daily active users grew 8% year-over-year. This metric remains critical for Meta’s ability to generate advertising revenue.

Cash Flow Takes a Hit

Not all metrics moved in the right direction. Free cash flow dropped to $10.6 billion in the third quarter.

That’s down from $15.5 billion in the year-ago period. The decline reflects the impact of higher infrastructure spending on the company’s cash generation.

Meta still generates substantial cash flow even while ramping up spending. But the trajectory raises questions about how much of today’s cash will be consumed by tomorrow’s AI buildout.

The company maintains a strong balance sheet. This financial cushion provides room to make these investments without threatening the core business.

Forward revenue guidance came in higher than Wall Street consensus. This suggests management sees continued momentum in the advertising business.

The situation draws comparisons to Meta’s metaverse spending spree. The company formerly known as Facebook poured billions into virtual reality technology that never gained mainstream traction.

That spending contributed to a 77% crash in the stock from its 2021 peak to 2022 trough. Investors remember that lesson.

AI differs from the metaverse in important ways. The technology has already demonstrated real-world applications and adoption across industries.

Still, the scale of Meta’s planned spending creates uncertainty. Management hasn’t provided detailed projections for how AI investments will translate into incremental revenue or profit.

Li stated on the earnings call that the company is still working through capacity plans for next year. This lack of clarity adds to investor concerns.

The pullback has created a lower entry point for investors willing to take on the uncertainty. Meta’s core advertising business continues to grow at a healthy pace while generating strong profits.

The company serves billions of users across its platforms daily. This reach provides ongoing opportunities for monetization as social media usage continues to expand globally.

Management expects infrastructure investment to support AI-powered experiences across its apps. These features could make the platforms more engaging and improve advertising targeting capabilities.

The company plans to provide updates on capital spending and expense growth in future quarters. Investors will watch closely for signs that AI investments are driving incremental revenue growth.

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