Meta's AI Spending Spree Sparks Downgrade Despite Robust Ad Growth

What happened

Meta Platforms was downgraded to 'Hold' by analysts due to aggressive AI investment plans that lack a clear path to monetization, raising concerns about future returns. The company's projected 2026 capital expenditure rivals Google's, but it has no proven competitive edge in AI research, casting doubt on its ability to justify the spending. Recent revenue growth, including a 26% year-over-year increase in Q3-2025, is partly driven by higher ad load, a lower-quality lever that may not sustain margins. This comes as Reality Labs losses are expected to rise in 2025, and EU regulatory pressures like 'consent-or-pay' add friction to ad targeting. Investors must balance Meta's strong core ad performance and cash flow against the risks of speculative AI outlays and mounting expenses.

Implication

The downgrade signals that Meta's ambitious AI capex may not generate near-term profits, potentially compressing margins and free cash flow. Core ad growth, while strong, relies on ad load increases which are less sustainable and margin-accretive than pricing improvements. Rising Reality Labs losses and regulatory headwinds in the EU could further dampen earnings and valuation multiples. Without evidence of AI monetization or cost controls, the stock faces limited upside, reinforcing the 'Hold' recommendation. Monitoring ad KPIs and regulatory outcomes is crucial to assess whether these risks materialize or abate.

Thesis delta

The new article reinforces the DeepValue report's 'Hold' thesis by highlighting the speculative nature of Meta's AI spending and ad load dependency, which were already key concerns. This underscores that near-term upside is constrained, and investors should await clearer signs of AI profitability or regulatory stability before considering a more bullish stance.