There's a lot in Meta Platforms' (META)
recent financial updates for the bulls to like. The social media giant
is generating incredible top-line momentum. In addition, management
guided for even faster growth in Q1.
But here's the issue: Meta's artificial intelligence (AI)growth
initiatives are slowing its earnings growth. And it seems to be
worrying investors. The stock is down about 10% year to date.
Could the stock go even lower this year? Given the staggering shift in the company's cost structure, possibly.
Here is a closer look at why the stock's recent pullback might just be the beginning.
Image source: Getty Images.
The top-line distraction
To be fair to the bulls, Meta's revenue trajectory is undeniably
strong. The company generated $59.9 billion in fourth-quarter revenue,
representing a 24% year-over-year increase.
And management expects this momentum to accelerate.
For the first quarter of 2026, Meta guided for revenue between $53.5
billion and $56.5 billion. At the midpoint, that forecast implies a
year-over-year growth rate approaching 30%. With 3.58 billion daily
active users across its family of apps (Facebook, WhatsApp, Instagram,
Threads, and Messenger), the tech company is successfully flexing its
pricing power and driving higher ad impressions.
But great top-line growth doesn't automatically translate to a great investment.
A structural shift in costs
The core issue dragging on the stock is the sheer magnitude of Meta's
spending. The company is actively transitioning away from its
historically asset-light software roots into a more capital-intensive
business.
This pivot is already showing up in the numbers.
Meta's fourth-quarter total expenses surged 40% year over year to
$35.1 billion. That dramatic increase in costs is weighing on its
operating margin (fourth-quarter operating margin was 41%, down from 48%
in the year-ago period), causing a significant slowdown in
earnings-per-share growth. Meta's fourth-quarter earnings per share
increased 11% year over year. This is a significant slowdown from the
prior quarter, when adjusting for a one-time item that affected the
period; adjusted earnings per share in Q3 rose 20% year over year.
And the pressure is only going to get worse. Management guided for
full-year 2026 expenses to land between $162 billion and $169 billion --
up from about $118 billion in 2025.
"The majority of expense growth will be driven by infrastructure
costs, including third-party cloud spend, higher depreciation, and
higher infrastructure operating expenses," management explained during
the company's fourth-quarter earnings call.
Even more staggering are the company's capital expenditures
to support its planned infrastructure build-out. Management forecast
2026 capital expenditures to be between $115 billion and $135 billion.
The midpoint of this guidance range would be about triple the company's
2024 capital expenditures and far above 2025 levels, too.
As these capital expenditures convert into significant depreciation
charges on the income statement, profitability will face severe
headwinds.
Meta is no longer just dealing with the uncertainty introduced by the
AI era; it is also facing negative earnings tailwinds from its own
spending plans.
Valuation risk
This brings us to the stock's valuation. As of this writing, Meta trades at a price-to-earnings ratio of about 25.
While that multiple might look reasonable for a company posting 24%
revenue growth, it leaves very little cushion for a business undergoing
massive margin compression and transitioning toward a capital-intensive
operation. If earnings growth continues to stall under the weight of
infrastructure costs and rising depreciation, the market will likely
demand a lower premium.
It is entirely plausible that investors decide a heavily capital-intensive business model deserves a lower valuation
multiple. If the market rerates the stock to a price-to-earnings ratio
of 20 to account for increased uncertainty around big spending and the
earnings pressure we're already seeing, shares could fall significantly
from here.
Of course, there is no way to know exactly where the bottom is. Meta
CEO Mark Zuckerberg has successfully navigated major platform
transitions before, and over the long haul, my guess is that the stock
works out decently well.
But the current cost pressures are a major concern.
Until the tech giant can prove that its staggering artificial
intelligence investments will generate an attractive return on invested
capital, I think investors should view this as a higher-risk play. For
now, it makes sense to keep any position in the stock small.
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Daniel Sparks
and his clients have no position in any of the stocks mentioned. The
Motley Fool has positions in and recommends Meta Platforms. The Motley
Fool has a disclosure policy.
Image source: Getty Images.
