Social-media giant Meta Platforms reported solid third-quarter earnings results on Wednesday afternoon. Shares fell 1.9% to $684.52 after rising 0.5% in regular hours Wednesday.

Third-quarter earnings came at what may be a turning point for Meta and its artificial-intelligence strategy. But in the process of getting there, the company's mounting expenses are weighing heavily on its profitability.

Earnings per share were $3.83, up from $1.05 last year, and below Wall Street projections of $6.54. But the third quarter of 2025 saw a large noncash tax charge, and EPS would have been $7.25 if it was excluded, according to Meta. This quarter, Meta booked a $9.9 billion charge related to its August multistate legal settlement over child-safety issues on its social-media platforms. Without the charge, EPS would have been $7.40.

This comes after $2.4 billion in legal costs and another $1.2 billion in severance expenses last quarter. Headcount was down 15% from last year.

Revenue for the quarter reached $64.6 billion, ahead of expectations of $63.3 billion, and up 26% on the year. That represents Meta's 17th straight quarter of beating sales expectations. Despite the ad business' maturity, internal deployment of AI for better platform engagement and ad targeting has accelerated the company's revenue growth in the past year.

Revenue guidance for the fourth quarter beat the Wall Street consensus modestly. The company also edged up the midpoint of its capital expenditures guidance for the year.

Third-quarter Capex came in below expectations, but that still wasn't enough to stop free cash flow from going negative. Analysts do not expect free cash flow to return until 2029.

Expense growth outpaced sales growth, and even after excluding the legal charge, operating margin fell from 40% last year to 35%.

Of particular note are depreciation costs from the company's capital expenditures -- which may stretch up to $145 billion this year -- and research and development spending.

The company also had nearly $700 billion in long-term supply and lease commitments at last count.

But all the Capex and research expenses are beginning to pay off by vaulting Meta into one of the leading positions in AI technology. In the second week of September, Meta released what may become the first successful personal AI agent, Muse, and last week it announced new Wonder AI models that rival the best from industry leaders OpenAI and Anthropic.

The Muse agent has over 3 million daily users, according to market research firm Similarweb. This is still less than 0.1% of Meta's overall user base, but growth has been fast. The company has a long way to go to make Muse agent a mass-market product, but that also underscores the scale of the opportunity.

Meta makes almost all its revenue from ads but, at least at first, it is trying to offset the increased Muse expenses with e-commerce revenue. Personal agents can take a conversational command and execute an entire retail transaction, from which Meta takes a small fee. But some shopping sites, like Amazon.com, are blocking Muse.

We can see the costs now, but the payoff won't be immediate. "Scaled behavior change takes time (and a strong product with a consistent, high utility experience)," wrote Brian Nowak of Morgan Stanley in a Sunday note. "So while we are bullish Muse (and agentic), we encourage investors to keep reasonable adoption rates in perspective."

Nowak raised his price target from $775 to $820, and maintained his Overweight rating.

CEO Mark Zuckerberg used much of his scripted presentation on the earnings call to talk about Muse. He gave some color around downloads and user retention, which are strong at this early stage.

"Now that Muse has clear product-market fit, we are entering a new phase and a more operational phase that is focused on scaling it," he said. "We need to do three things: scale the product, grow revenue, and optimize compute costs. We expect to grow Muse to serve billions of people. This is both our mission and our strategy."

The stock took another leg up after this discussion, but that didn't last long.

"Muse's compute intensity means that expanding its user base will require significant investment, and we expect total serving costs to rise," Susan Li, Meta's chief financial officer said on the call, prompting the stock to retreat.

Until Muse adoption scales, Meta will remain judged on how well AI is juicing ad revenue growth, and how much the company can tame expenses.

Meta also announced a new class of non-voting shares, the point of which seems to be to keep the company under Zuckerberg's control should it have to raise equity capital.

"We created this new class of shares with the purpose of creating a publicly traded non-voting stock usable for capital raising, employee compensation, acquisitions, other general corporate purposes," Li explained. "While preserving the voting power of existing class A and B shareholders, we believe the share class will maintain our founder-led structure."

Each shareholder of class A and class B shares will receive an equal number of the new class C stock after January 19 in a special dividend.