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Meta Stock Analysis: AI CapEx vs. Advertising Revenue Prospects
Meta Platforms (META) has seen limited movement since December 2024, but the recent sell-off following its third-quarter earnings has caught investor attention. Despite concerns over rising capital expenditures (CapEx) linked to AI investments, the company’s underlying growth prospects and valuation metrics suggest potential for significant upside.
What Triggered the Recent Sell-Off?
After Meta’s most recent earnings report, the stock dropped nearly 17% from its highs, driven primarily by fears surrounding higher AI-related CapEx. Analysts acknowledged strong core business performance but raised pointed questions about ROI on CapEx, expense growth, and the monetization runway for new AI products.
Investors are drawing parallels to Meta’s previous strategic pivot with Reality Labs and the metaverse. Following the 2021 rebranding from Facebook to Meta, Reality Labs’ heavy spending caused a ~65% decline in the stock, as the segment accumulated over $73 billion in losses by Q3 2025. While the metaverse initiative initially worried investors, growth in Meta’s core advertising business eventually led to a rebound.
This time, however, the CapEx is aimed at AI infrastructure, including data centers and model training capacities, which directly support Meta’s advertising ecosystem. Unlike speculative metaverse spending, these AI investments are expected to enhance ad targeting, user engagement, and content distribution on Facebook, Instagram, and Threads.
AI Could Boost Profitability
Meta’s AI initiatives have the potential to improve advertising ROI, increasing click-through rates and driving higher top-line growth. Even modest margin gains from AI could significantly impact earnings. A 2-percentage-point increase in EBIT margin could add approximately $4 billion to Meta’s EBIT in 2025. Combined with the robust digital advertising market, these efforts may position Meta favorably for long-term growth.
Valuation Analysis and Cash Flow Considerations
Evaluating Meta requires factoring in historical trends. The 2022 sell-off was an outlier, with extreme EBIT margin compression and poor cash conversion. In 2025, Meta’s YTD EBIT margin stands at 41%, consistent with historical averages. Free cash flow conversion is projected to recover from the 51% rate caused by AI and metaverse CapEx back to a long-term 80% level.
Revenue for FY2025 is expected to reach approximately $198 billion, assuming Q4 hits the guidance of $57 billion. Using a WACC of 9% and perpetuity growth of 3.5%, Meta’s current valuation appears justified if the company grows 10% annually over the next seven years. Given the global digital advertising market’s expected growth of up to 16.5% per year until 2033, Meta could be undervalued by up to 33%, even without assuming long-term margin improvements.
Lessons From the Metaverse Pivot
While there are similarities to the 2022 metaverse-driven sell-off, a key difference is that AI CapEx directly strengthens Meta’s core advertising business. In contrast, early metaverse investments had uncertain monetization paths and diluted short-term profitability. AI initiatives offer measurable benefits to revenue and margins, reducing investor risk compared to past speculative ventures.
Meta’s Strategic AI Investment May Pay Off
Meta’s recent stock weakness is tied to justified concerns over AI spending, but the underlying advertising business remains robust, with AI likely to enhance both revenue and margins. By targeting 10% annual growth, Meta’s current valuation could be supported, and with the broader market expected to grow around 15% annually, the company may even be undervalued.
For investors, this suggests that the current dip in Meta shares may present a compelling opportunity, as the company leverages AI to strengthen its advertising ecosystem. While careful monitoring of CapEx impact is warranted, the fundamentals indicate that Meta could be poised for long-term growth, making it a potential strategic buy.
