A Wells Fargo analyst warns of a near-term profit hit from AI infrastructure spending and legal costs - but thinks that will set up massive gains by 2028

A $10 billion legal-settlement charge is expected to drag Meta's third-quarter earnings per share down to $3.72, Wells Fargo believes.

Early excitement surrounding Meta's artificial-intelligence assistant Muse has sent the stock higher, but Wells Fargo sees even bigger gains ahead.

On Tuesday, Wells Fargo analyst Ken Gawrelski raised his price target on Meta shares (META) to $1,000, from $796 previously. The new target is the highest among analysts tracked by FactSet.

A $1,000 price target marks roughly 35% upside from current levels. But reaching that target will require more spending in the immediate future, according to Gawrelski.

He called for a "dose of caution" going into the company's third-quarter earnings, which are scheduled for later this month. Gawrelski anticipates a near-term hit to Meta's earnings due to litigation costs and a ramp-up of infrastructure spending to support Muse's product trajectory.

Wall Street had been speculating whether Meta would begin leasing out its data-center capacity as a way of monetizing its AI infrastructure in a highly profitable manner. However, Gawrelski removed 500 megawatts of capacity resales - representing roughly $5 billion in potential revenue - from his 2027 forecast, noting that the explosive growth of Muse means that Meta will need to keep all of that processing power for itself.

Gawrelski believes Muse could be the catalyst for an AI-driven product cycle that could ultimately be much larger than Meta's successful Reels rollout in 2022. In Wells Fargo's most upbeat scenario, continued strength from Muse, Reels and the core advertising business could drive the stock to $1,211.

For 2027, Gawrelski expects operating expenses of $210 billion to $215 billion, higher than the Wall Street consensus of $202 billion. He also anticipates $250 billion of capital expenditures, or long-term spending on heavy infrastructure. That would be a significant step up from the $130 billion to $145 billion in capex that Meta projects for 2026.

Additionally, Meta is taking a $10 billion legal charge in the third quarter of this year to resolve general litigation concerning social-media platforms, which Gawrelski believes could lead its earnings per share to come in at $3.72 for the quarter, versus the Wall Street consensus of $6.14.

These downward adjustments to Meta's earnings likely mark a "trough-cycle EPS," according to Gawrelski. He expects the company "to be a consistent positive revisions story as [the] market begins to layer in AI product revenue contributions in '28 and beyond."

In other words, Meta's earnings story could only get better from here.

Also: Meta turned Muse into a viral hit. Now comes the hard part.

-Christine Ji