Meta Stock Drops 12% After Q3 Earnings Reveal Rising AI Costs

Shares of Meta Platforms, Inc. dropped by roughly 12% after the company reported its third-quarter earnings and outlined a steep increase in spending tied to artificial-intelligence infrastructure. While revenue rose 26 percent to about US$51.42 billion, well above analyst expectations, investors reacted to the striking jump in expense guidance and the sizable one-time tax charge, raising questions about near-term profit margin resilience.The selling reflects concern that the heavy investment burden may outweigh short-term gains even as Meta’s core business remains strong.

Why the stock dropped ~12%

Despite the strong top line, Meta’s stock fell by about 12.5 percent on the day following the earnings release. Several factors explain the negative reaction.

First, the company took a major one-time tax charge of around US$15.9 billion which reduced GAAP earnings per share to US$1.05 in quarter. Excluding that tax item, adjusted earnings per share would have been around US$7.25, strong in isolation, but investors focused on the reported number and the headline tax impact.

Second, Meta raised its capital-expenditure and expense guidance materially. The company warned that cumulative spending in 2026 will be “notably larger” than in 2025, driven both by infrastructure investment and compensation for technical talent. Forecasts cited expenses for 2026 potentially reaching US$97 billion.

Third, investors balked at the combination of growth and risk. While growth remains solid, the margin trajectory has become less predictable given the escalating cost base. As one note observed, Meta’s shift from cost discipline to a heavier spend model introduces greater uncertainty.

Finally, while analysts remain broadly optimistic about the longer-term story, some downgraded the stock or flagged the spending as “runaway”. The market reaction reflects caution that the timing of returns on heavy AI investment may be later than many expect. The 12% drop therefore ,signals that shareholders are reallocating to what they perceive as clearer-cut risk-reward profiles.

Catalyst and concern

Meta’s aggressive push into artificial intelligence sits at the centre of the narrative. The company is investing in data-centre capacity, custom hardware, AI talent, and new products that embed AI-driven ad optimisation. The hope is that AI will enhance user engagement, deepen targeting and thus further strengthen its advertising business. Reports ahead of the quarter pointed to gains in ad impressions and pricing associated with AI-driven improvements.

From the catalyst view, this makes sense: a company with Meta’s scale can potentially benefit from incremental gains in ad yield if engagement and targeting improve. Indeed, prior quarters showed strong ad growth and engagement uptick, helping to justify the investment. The company has described this as an important strategic shift and one that can widen its moat over time.

Moreover, the heavy spend amplifies risk. If the platform environment slows, or regulatory pressures intensify, the return-on-investment window may extend. The market is especially sensitive in this cycle because many tech firms have made big AI investments only to face delays in revenue realisation. Meta’s size offers more cushion than many, but also means greater expectations.

In summary, the AI strategy is both the key opportunity and the core risk. Investors are asking whether the future payoff is worth the present cost burden, especially when margin expansion has less margin for error.

What this means for investors & what to watch

For investors, several themes emerge. First, margin and free-cash-flow trends will matter more than headline revenue growth. With costs ramping, if free cash flow weakens the sentiment may deteriorate further. Keeping an eye on Meta’s quarterly disclosures of capital expenditure and depreciation trends will be helpful.

Second, the timing of returns from the AI investment will be crucial. Investors will want to see meaningful contributions from AI-powered ad products, beyond incremental gains in the core business. Meta’s guidance and commentary around when new revenue streams might scale will be a key checkpoint.

Third, guidance and visibility into expense growth will influence sentiment. If Meta signals that spending will moderate, or that it expects economies of scale in AI infrastructure, confidence may improve. Conversely, if spending continues to accelerate without clarity on returns, risk perception may rise.

Fourth, competitive and regulatory risks should not be ignored. Meta faces rival tech players making their own AI plays and regulatory scrutiny in multiple jurisdictions. These factors can amplify uncertainty.

Conclusion

Meta’s third-quarter results delivered strong revenue growth and confirmed the resilience of its advertising business. Yet the stock’s ~12 percent drop highlights how much weight the market places on cost discipline and clear pathways to profit when investment is heavy. Meta’s large-scale AI commitment lies at the heart of its future strategy, but it also introduces a degree of uncertainty that investors are unwilling to overlook. As Meta transitions from growth-at-any-cost into a more mature investment phase, the focus now turns to execution, timing and proof that the heavy spending will pay off.