Although the market is close to an all-time high, you wouldn’t know it based on the fear on one side of the market. There is talk of an artificial intelligence (AI) bubble, fueled by huge spending on the technology.
One of the stocks that has faced market concerns about big AI spending is Meta platforms(NASDAQ: META). The company starts to expand a bit, spending more money than their cash flow is providing, forcing them to take on debt to fund their aspirations. This has the market extremely worried, which is why the stock is down about 20% from its all-time high.
However, I think it’s an excellent buying opportunity right now, and long-term investors will be able to benefit from Meta’s growth plans a few years down the line, making today’s share price a bargain.
Image source: Getty Images.
Meta is the parent company of several social media sites, including Facebook (the company’s former name) and Instagram. The company also has a Reality Labs division that focuses on bringing augmented reality and virtual reality devices to consumers, though that segment has been a money pit. Management spends much more on this division than it generates, but it is more than compensated by its strong advertising activity.
In the third quarter, $50.1 billion of total revenue of $51.2 billion came from advertising. The Family of Apps division (which includes ad revenue) generated operating profits of $25 billion, while Reality Labs lost $4.4 billion.
However, if the company can launch a product that incorporates generative AI into an everyday device that isn’t a computer or a mobile phone, as it is with the smart glasses it’s developing, the fortunes of the Reality Labs division could turn around. But there is no guarantee of this.
The backbone of the business will likely always be its social media platforms, and it has already seen improvements from AI. CEO Mark Zuckerberg said the technology led users to spend 5 percent more time on Facebook and led to better ad conversions. This led to revenue growth of 26% year over year in the third quarter.
Few companies of Meta’s size can claim such rapid growth, making it one of the top growth stocks on the market. The problem is that Wall Street is not happy with his spending plans.
Meta plans capital expenditures of $70 billion to $72 billion in 2025, primarily focused on data center construction. For 2026, the dollar amount is expected to be significantly higher than it was from 2024 to 2025. With investment capital totaling $39.2 billion in 2024, this indicates that the 2026 figure will exceed $100 billion.
Over the past 12 months, the business has generated about $107 billion in cash from operations. This means that his investment plans will eat up almost all the money he generates.
META Cash from Operations (TTM), data by YCharts; TTM = last 12 months.
This is a red flag for the market and that is why the stock has fallen so much. However, management may have a plan to cut costs. Recently, a report surfaced saying that Meta is in talks Alphabet to buy Tensor Processing Units (TPU) of Alphabet. These are specialized chips that I can compete with Nvidiagraphics processing units (GPUs) at a lower price, but at the cost of flexibility.
By buying TPUs from Alphabet, Meta could get more computing power at a lower price or reduce the expected cost of building its data center. Either way, this development could be a big problem for the Meta.
Despite this positive news, its shares have barely budged and trade for 25 times forward earnings.
META Data ON Report (before) by YCharts; PE = price to earnings.
It’s not necessarily cheap, but it’s cheaper than it’s been in recent months. I believe the market will return to equities in 2026 as some of the AI spending may be realized. Even if not, expenses will eventually come down and Meta will go back to being the monstrous cash flow machine it always was.
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Keithen Drury has positions in Alphabet, Meta Platforms and Nvidia. The Motley Fool has positions in and recommends Alphabet, Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.
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