The market's negative reaction and current weak performance are primarily driven by two factors: - A $15.9 billion tax expense impacting Q3 results. - Plans to invest $600 billion in capital expenditures (CapEx) for AI infrastructure over the next year.

For most of this year, Meta's valuation has remained elevated, leaving investors few opportunities to accumulate shares—except during early-year fluctuations and April’s tariff-related volatility. Now, with shares down 22% from their all-time high of $800, valuations have contracted while fundamentals remain intact, flipping the risk-reward ratio. Analysts consider Meta one of the most attractive buys among the "Magnificent Seven" (Mag7).

**Meta’s Q3 Performance** Meta reported Q3 revenue of $51.2 billion, up 26% YoY and $1.8 billion above estimates—a significant beat. The core growth driver remains digital advertising, with average ad prices continuing to rise. However, strong revenue was partly overshadowed by a decline in operating margin, which fell from 43% YoY to 40% in Q3 2025.

While analysts previously highlighted Meta’s operational edge—outpacing peers like Google (GOOGL) in profitability—costs surged 32% YoY, exceeding revenue growth. This stems partly from increased AI-related R&D spending. Historically, Meta’s profitability has driven stock volatility, as management tends to over-invest in long-term bets (e.g., the metaverse, Reality Labs, and now AI).

The biggest miss in Q3 was EPS: $1.05, far below expectations and down 83% YoY. This was not an operational issue but due to a one-time $15.9 billion tax charge tied to the *One Big Beautiful Bill Act*. Excluding this, net profit would have been $18.6 billion, up 18% YoY.

Overall, the mixed results amplified market pessimism. Yet, the key lies in the business’s core strength: digital ads (98% of revenue) grew 26% YoY. Meta’s "Family of Apps" benefits from multiple tailwinds: 1. Advertisers shifting budgets from traditional to digital platforms (a trend also benefiting Google). 2. Average ad prices rose 10% YoY. 3. Key markets: U.S./Canada grew 13% (up 4 bps from Q3 2024), while Europe surged 19%—a five-quarter high.

Global ad impressions increased 14% YoY, driven by Meta’s superior content-recommendation system (seen as outperforming YouTube’s). The logic is simple: better recommendations → longer app engagement → higher ad prices → revenue growth. Daily active people (DAP) rose 1.7%.

**Meta’s Spending Outlook** Meta raised its 2025 CapEx guidance by $4 billion at the low end, now projecting $70–72 billion. Q3 alone saw nearly $20 billion in CapEx—more than triple YoY—signaling accelerated spending. However, peers like Microsoft (MSFT), Amazon (AMZN), and Google spend more while maintaining diversified businesses.

Most CapEx targets AI infrastructure: - New data centers. - Nvidia (NVDA) H100/H200 chips. - "Meta Superintelligence" projects. - In-house AI models (e.g., MTIA2 clusters).

Analysts note that higher CapEx is justified if returns are sufficient. Assuming $100 billion annual CapEx, Meta would need at least 20% revenue growth to validate the spend. Current projections align: 21% growth in 2025, 18% in 2026, with CapEx below $100 billion yearly.

The risk lies in misallocated capital—investing in low-ROI projects could strain cash flow and future profitability via higher depreciation. Meta confirmed plans to invest $600 billion in U.S. AI infrastructure by 2028.

**Valuation** Pre-earnings, Meta traded at over 32x P/E—cheaper than Mag7 peers but unattractive. Post-drop, it’s at 27x. While not a "steal" (April’s 21x P/E or past sub-10x levels), Meta’s 15-year average P/E is 32x, matching its 32% EPS CAGR. FactSet forecasts: - 2025: EPS $22.90 (down 4% due to tax charge). - 2026: EPS $29.75 (up 30% recovery). - 2027: EPS $33.35 (up 12%).

Beyond 2025’s one-time hit, the long-term EPS outlook is unchanged—yet the stock has fallen sharply. Lower price + unchanged thesis = higher expected returns. While Meta’s 3–5 year EPS growth may not match its 15-year average, its maturity justifies premium valuation. At 27x P/E, it nears the S&P 500’s (SP500) current multiple.

**Risks** Meta isn’t risk-free: 1. **Excessive CapEx**: Sustained spending could pressure cash flow and margins. Past missteps (e.g., metaverse) show the cost of poor capital allocation—AI underperformance could repeat this, risking investor confidence. 2. **Revenue Concentration**: 98% reliance on cyclical digital ads leaves Meta vulnerable to ad slowdowns, user stagnation, or regulatory headwinds (e.g., EU curbs on personalized ads). Peers like Google and Microsoft enter AI with more diversified models.

**Conclusion** Meta’s Q3 confirmed robust growth and ad demand resilience. Though tax charges and rising CapEx spooked investors, fundamentals remain strong: ad prices and impressions are rising, while AI-driven engagement grows. Higher R&D spending weighs on margins now but could unlock future growth if deployed wisely.