Meta Platforms experienced another significant drop in its stock price following the latest earnings report, even as the company posted substantial revenue gains. Quarterly revenue rose by 28% year-over-year to $60.8 billion. However, this strong financial performance was overshadowed by a decline in earnings per share and mounting concerns over capital expenditures. The market's response reflected worries about the company's spending and its ability to deliver returns from such large investments.
Meta's earnings per share came in at $6.18, which was below the $7.22 that analysts had forecasted. A major reason for this shortfall was a combination of $2.4 billion in legal costs and nearly $1.2 billion in severance costs. These expenses distorted the initial results but did not reflect the true performance of the business. Adjusted for these charges and factoring in Meta's effective tax rate, the actual EPS would have been $7.35—well above what experts were projecting.
AI powers ad success as Reality Labs continues to lose money
Meta's advertising segment saw robust growth, climbing 27% to $59.4 billion in revenue. This success was largely due to the company's use of artificial intelligence. Meta's Generative Recommender system enhanced ad targeting by improving the understanding of ad content and user preferences. As a result, the company achieved a 14% increase in ad impressions and a 12% rise in average ad prices. More than 9 million small businesses have integrated Meta's generative AI creative tools into their marketing efforts, and its AI-driven Advantage+ platform has reached an annual recurring revenue run rate exceeding $75 billion.
Despite these positive trends, Meta's Reality Labs, responsible for the metaverse and augmented reality devices like headsets and smart glasses, posted a $4.6 billion loss. Revenue from this division increased 16% to $431 million. The continued losses are a red flag for investors, as the returns from these ambitious projects remain unclear. Although the company took a step to reduce costs by shutting down the Horizon Worlds virtual reality platform in June, it's not yet evident how much this move will impact the division's financial outlook.
Rising expenses and uncertainty about spending
Meta's operating expenses soared by 55% to $42 billion. Even when excluding the one-time charges, expenses rose by 42%. Despite the hefty spending, the company still generated $784 million in free cash flow for the quarter, and it has produced $13.2 billion in free cash flow so far this year. This demonstrates a notable ability to generate cash even as investments climb.
Capital expenditures for 2026 are now expected to fall between $130 billion and $145 billion. This is a slight increase from the previous range of $125 billion to $145 billion. Although Meta did not provide a forecast for 2027, it indicated that it plans to maximize its capacity in the next two years, suggesting further spending could be on the horizon. These high levels of investment raise concerns among investors, especially regarding the long-term returns on such massive outlays.
Looking at the company's near-term outlook, Meta anticipates Q3 revenue to be between $61 billion and $64 billion, representing a year-over-year growth rate of 19% to 25%. Analysts had expected $63.2 billion for the period. Meta's continued focus on AI remains a strategic priority, and the company believes this focus is key to achieving long-term growth.
Despite the challenges in the Reality Labs division, the overall growth in Meta's core business remains strong. Daily Active People, a key metric measuring users who interact with Meta's apps, rose 3.5% to 3.6 billion year-over-year. This growth is a testament to the company's continued dominance in the social media landscape.
Meta's stock currently trades at a forward P/E ratio of just over 14 based on 2027 analyst estimates. Although it is not without flaws, particularly in its Reality Labs business, the company's solid revenue growth and reasonable valuation make it an interesting opportunity for investors willing to overlook the short-term challenges and focus on long-term potential.
With the recent drop in the stock price, many are asking if this is the right time to buy. While the headline numbers may appear concerning, the underlying fundamentals remain strong. Meta's ability to leverage AI to improve its ad business and drive higher user engagement is a clear advantage. As long as the company can continue to deliver returns on its investments, the current market response could present a compelling entry point for long-term investors.