Meta Stock Just Dropped... Is This a Buying Opportunity?

Ajouté : 2026-05-10

[00:00:00]Last week, Meta stock fell sharply following its earnings results. It beat on revenue and earnings, but what worried investors was their guidance on capex spending. Meta plans to spend more than $125 billion on AI infrastructure and development, which has investors on edge. So, in this video, we're going to dive deep into the stock, look at the fundamentals, look at the story, and see if this dip is justified and whether or not it might be a decent entry point for someone who's looking to buy some shares. Now, as always, none of this is personal investment advice. This is just our opinion based on the research and analysis we've done. So, the stock is down almost 10% since last week because of those spending fears. And this is actually something we've seen before. In 2022, investors freaked out because Zuckerberg spent about 13 billion on the metaverse. The metaverse, of course, was an unproven business segment, and so the stock lost more than 75% of its value during that sell-off. But check out what happened after that. more than a 5x return since 2022. So this situation we're seeing is similar. It's a far less intense version of 2022, but it's a similar kind of scenario where history might be repeating itself. Now, when we look at Meta's performance over the last few years, it's been solid. 22.1% revenue kagger in the last two years.

[00:01:17]Earnings up 25.7% in the last two years, although slightly down last year. Free cash flow also up since those 2022 levels, but again slightly down in the last year as well. The reason free cash flow and earnings were down in 2025 is because of the heavy investments Meta has been making in AI infrastructure model development and integration.

[00:01:37]That's why the stock has been down since last year. And again, that's the reason for the most recent sell-off. But here's the part that people seem to forget.

[00:01:45]This company is a cash compounder. Yes, they spend a lot, but they're able to turn those investments into serious returns. Meta has some of the best returns on capital in all of tech. Their trailing 12 months return on invested capital is 31%. The 5-year average is around 32% and the 10-year average is around 34%. Those are really strong consistent returns on capital. And the proof is in the way they allocate capital and focus their efforts. 2022 is a great example. Yes, they wasted about $13 billion on the metaverse, but even after that, they were able to successfully pivot their spending into AI and the llama models, which significantly boosted retention and watch time on their app platforms and help them monetize reels more successfully.

[00:02:29]They coupled that with operational efficiencies like layoffs and changing their org structure and management structure to be more lean. And finally, they also bought back a lot of shares.

[00:02:39]All of these actions created serious returns for shareholders and quite frankly made the metaverse spending spree look pretty insignificant. And so now they're spending even more money on AI in the hundreds of billions of dollars. But again, there's a reason for the madness. And here are a few things to understand and keep in mind when you consider that spending. First, almost all of Meta's money, almost 99% of their revenue comes from ad spend. They make money by charging businesses for ad space. That's basically the business model. And here's why that's important.

[00:03:11]Meta now has about 3.5 billion daily active users. If you look at monthly active users, that number is closer to 4 billion, which is basically half of the entire human population. If you consider just the folks that have access to the internet, Meta is used by 77% of human beings. That's pretty ridiculous.

[00:03:30]They've been able to monopolize and capture almost everyone's attention. And this is important to better understand where their future growth is going to come from. Getting more new users onto their platforms is going to be difficult. They've already reached a point of market saturation where doing that is not going to be easy anymore.

[00:03:47]And so future growth will have to come from better monetizing their current user base. And there are basically two ways to make that happen. The first is that they need to increase retention and watch time on their app platforms like Facebook and Instagram so that people are more exposed to ads. The second is that they need to make ad matching more effective so that every dollar of ad spend goes farther in getting businesses actual customers. In other words, they need to show ads to people that already have a strong intent to purchase.

[00:04:16]Because if the ads become more effective, then more businesses will want to spend on Facebook ads. So, how can they do both of these better? Well, you guessed it, AI. the better their models are at predicting what people want to watch next and what ads people are more likely to respond to, the better the growth will be. It's that simple and that's what the impetus is for all these AI investments. This is also what their new proprietary model is currently doing for them. So, how are the AI investments going to happen?

[00:04:46]Well, they're going to happen in three main ways. First, investments are going to flow into AI that can improve the user experience. And that starts with improving Meta's advanced ranking capabilities. Meta uses massive compute to analyze every frame of every reel in order to match it to a user's current mood. So, for example, if you're watching a video of a mountain bike, the AI doesn't just show you more bikes. It also predicts that you might be interested in other outdoorsy things like hiking or traveling to Utah or Wyoming. Now, a large part of their investment in this first bucket is also going to meta AI or towards their agentic AI assistance. And the goal of this is to turn the app platforms into utility apps. Apps that can plan trips, summarize threads, or generate images rather than just being contentoriented scrolling feeds. Meta expects those additional utilities on the apps to make them even stickier.

[00:05:40]The second bucket of investment is going towards AI that will improve ad efficiency. And the goal here is to use Gen AI to lower the cost per acquisition for advertisers.

[00:05:50]Part of this is improving matching between users and ads. The models predict the likelihood that you'll buy a product or service based on millions of other similar users. And that's because right now Meta can't see the things people actually buy on the web. So it has to infer them probabilistically. So these matching algorithms and methods have become a lot better and they have to continue becoming better. In addition to this, Meta is also heavily investing in AI tools that advertisers can use to make their ads more effective. This is what Advantage Plus is all about.

[00:06:21]Advertisers can now upload a single image for an ad and Meta will autogenerate different backgrounds, adjust the music and write copy in different languages to match the viewer's tastes. It essentially takes a single ad and can personalize it many times over for users. Now, what both of these things do is make advertising spending go farther. Advertisers can now get more purchases for the same amount they spend on ads. And what's unique about Meta's model is that these services are free. Advertisers don't have to spend more on Advantage Plus and Museark. They come at zero additional cost. And so what this does is that it drives creators to spend more on ads. If the ads get more effective at no additional cost, creators will end up running more ads anyways.

[00:07:06]And this is where the third bucket of investment comes in. Accomplishing buckets one and two on Nvidia chips is going to be extremely expensive. And so Meta is now investing in its own chips, its own infrastructure that is uniquely designed for its models and processes and that will also be cheaper to run in the long term. This is where the vast majority of that 125 to 145 billion of capex is going towards. They're going to be spending a ton to build out the data centers that will power the engagement engine and the revenue engine. And that's why the market is spooked out.

[00:07:38]The bears aren't convinced that the returns on buckets one and two are going to outweigh the spending that is happening on bucket three. But Zuckerberg and management on the other hand are convinced that the spending on bucket three is not only going to power the better engagement and ad spend, but that it's also going to reduce operational costs significantly. That's really what the bull thesis is riding on. Now, what favors the bull thesis is the Q1 results. Their Q1 results were strong across the board and were proof that the investments they're planning to make are already yielding good results.

[00:08:10]In particular, their ad revenue grew by 33% year-over-year despite a slight dip in daily active users. That's super important to note because Meta didn't increase the number of users on its platforms by much since a year ago, only by about 4%. Yet, it made 33% more in ad revenue. So AI is really helping it to monetize its users much more effectively. That is a strategy that is actually working out. Now, here are a few additional numbers to support that.

[00:08:39]Ad impressions were up 19% year-over-year, and the average price paid per ad was up 12% year-over-year.

[00:08:46]So basically, Meta was not only able to increase the number of ads shown on their apps, but they also increase the prices paid for those ads. That's a pretty rare thing to do. And much of this was driven by better watchtime performance on reels, which grew by 10% in Q1 2026.

[00:09:03]In addition to that, their average revenue per person, ARP, was also 27% higher compared to a year ago. That basically means that they were able to make 27% more money on average from every person that's been staying on their platforms. Again, that's a huge win. And finally, their operating margins year-over-year have been fairly flat. That's important because they've already spent a ton of money on AI infrastructure and development, but despite that high spending, their operating margins are holding up. That's a great sign that the investments aren't placing an unsustainable drag on future earnings. Now, two other things that are helpful in this regard are the layoffs Meta is planning right now and the tax benefit that they received in Q1 2026.

[00:09:47]Right now, Meta is reducing its headcount by about 10%. Which will drive down some of its costs. In fact, their expense guidance for 2026 stayed unchanged, which is a signal that they're not necessarily spending way, way more money now, but that rather they're shifting their spending from human capital to technology. In the long run, that's probably better for the company anyways. Now, in addition to that, they're also going to use the $8 billion tax benefit that they received last quarter to fund the next round of chip purchases so that they don't need to load up on additional debt. And so, when we put all of this together, we can see that yes, the spending is high, but it's being targeted at high return opportunities that are already panning out. This is a very different situation from the speculative spending on the metaverse that was happening a few years ago.

[00:10:35]Now, of course, there are some risks that Meta is facing. First, they have lawsuits going on. Los Angeles found them liable for platform addiction, and that's opened up a floodgate of similar lawsuits. Meta could lose a lot of money from all these trials if things don't go their way. The EU also found them in breach for keeping under 13 year olds off of their platform, and so they'll be fined about eight billion dollars for that. Now, both of these things aren't just damaging in terms of fees and penalties. They're also damaging in terms of reputation, and they could lead to the core business slowing down permanently for young people. They may also have to turn off their most addictive features for everyone under 18, which again would hurt engagement for that younger segment. The other risk Meta is facing is that all the AI generated and AI filtered reels may not resonate well with users, which could drive them off the platform. We're already starting to see fatigue from some users about constantly seeing AI generated content on their feeds and wanting to move to a more authentic platform experience. That type of sentiment may increase in the future.

[00:11:40]Finally, unlike Google or Amazon, Meta doesn't sell its AI directly to customers. It uses its AI to make ads better. So AI for them is an indirect contributor to the top line. Now the risk here is that if Musepark makes building ads too easy, the premium for highquality ad creative is going to start to decrease. So their improvements to ads might actually deflate the total ad value because it makes the competitive advantage of having better ads much smaller. So there are definitely risks the company is facing.

[00:12:13]Not everything is moving forward in the right direction. But the important thing to note about the risks versus the core thesis drivers is that currently the data seems to back up the bull case more than it backs up the bare case. The risks we just cited are more speculative in nature. It's hard to tell how those will actually play out. And we don't have a lot of hard data to qualify all of those risk concerns. And so when you look at the situation unattached from a pure logic perspective, here's what you find. You find a company that has monopolized the world's attention.

[00:12:44]Again, half of all humans use their platforms every single month. And because of that, they've now run ahead of Google as the number one digital advertising platform. Social media isn't social media anymore. It's just media.

[00:12:56]It's the way businesses are grabbing people's attention. And Meta is the number one company they're using to do it. It's hard to imagine another platform coming along and trying to compete even remotely close to what Meta has achieved. And so the only way for Meta to grow now is to monetize rather than expand the user base. And that invariably means investing in AI. That's really the only way to do it. And we know that these investments can bear fruit because they have been as shown by the most recent quarterly results. Now, no one has a crystal ball and anything can happen. Things can go wrong. But again, when you look at the company, when you look at its market share, its track record of creating returns, the core thesis drivers and proof that their AI investments can yield returns. When you look at all of this, it's hard to make a super compelling argument for the bare case.

[00:13:47]So, if you believe in the future of the business, is this a good entry point?

[00:13:51]Well, if you look at the current valuation, Meta looks moderately undervalued. At this price, we don't think you're getting a massive discount, but you are getting close to a 20% margin of safety. Now, how do we get to this valuation? We used a relative valuation approach. We took the median PE, price to free cash flow, EV to Ebida, and EV to IC for Meta's main industry over the last seven years and then adjusted those multiples upwards for their immediate peers multiples as well as their own historical medians over the same period. We then apply those multiples on forward earnings, trailing 12 months free cash flow, Ford Evida, and last year's invested capital.

[00:14:28]Now, once we have the fair values from each of these methods, we blend them together in a weighted average that's appropriate for Meta and other companies like it. When we do all that, we arrive at a fair value of $720.

[00:14:41]Now, the important thing to note is that the fair value produced by the price to free cash flow method pulls that average down a bit. So if you exclude that one method, which you might want to given the capital expenditures that they're making, then the fair value is actually higher. But whether or not you do that either way, the valuation looks pretty attractive at the current prices.

[00:15:01]All right, that does it guys. That's what we think of Meta Stock. If you found this useful, hit the subscribe button below. We'll keep the videos and the analysis coming your way. And if you want to do this type of research yourself, check out valetrage.com.

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