Meta plans to significantly increase spending on AI this year.
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Back in January, Meta Platform (NASDAQ:Meta) announced that it will increase capital investment from $72 billion in 2025 to up to $135 billion in 2026. The company plans to use most of the money to expand its Meta Superintelligence Lab AI division.
This strategy is not surprising since Meta uses AI algorithms across its core social platforms such as Facebook, Instagram, Messenger, and WhatsApp. However, this plan could backfire and put pressure on the company’s stock price, which has fallen 3% since the beginning of the year.
Could the meta splurge backfire?
Meta is the world’s largest social media company, serving 3.58 billion daily active users (DAPs) across its family of apps (Facebook, Instagram, Messenger, and WhatsApp) at the end of 2025. This is a 7% increase from the end of 2024.
For the full year, Meta’s revenue increased 22%, but operating margin fell 1 percentage point to 41% and EPS decreased 2%. The decline in EPS was primarily due to one-time taxes. Still, continued losses at Reality Labs (an augmented reality and virtual reality business), expansion of its AI research and engineering teams, and investments in AI infrastructure compounded the pressure. Free cash flow (FCF) decreased 16% to $43.6 billion.
Meta plans to increase spending on AI infrastructure by purchasing more GPUs, developing custom chips, and building more data centers, which will further reduce FCF in 2026. This decline will compress valuations, as many investors value technology companies based on FCF yield (the percentage of FCF generated for every dollar invested in a stock) rather than EPS.
Meta’s trailing 12-month FCF of $43.6 billion divided by its current market cap and multiplied by 100 yields an FCF yield of 2.6%. A year ago, the FCF yield was 3.3%. The FCF yield will decline further as Meta’s increased capital expenditures will reduce FCF in 2026.
Meta’s increased spending could also weigh on its operating margins, which are already under pressure from the Reality Lab investment. As a result, Meta will need a higher-margin advertising business to make up for and subsidize its losses, which could be difficult if macro headwinds cause companies to rein in advertising spending again.
Should long-term investors be concerned?
Analysts expect Meta’s revenue and EPS to both grow at a CAGR of 20% from 2025 to 2028. The company’s stock appears to be undervalued at a P/E ratio of 19 times next year, likely because concerns about short-term spending are weighing down the company’s valuation. But if you expect these investments to pay off and strengthen Meta’s dominance in the social media and digital advertising markets, Meta’s recent pullback could look like a great buying opportunity.
Leo Sun has a position in Meta Platform. The Motley Fool owns a position in and recommends Meta Platform. The Motley Fool has a disclosure policy.
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