Meta Platforms shares tumbled in early Thursday trading, potentially hiving more than $200 billion from its market value, as the Facebook parent cautioned that the cost of AI investments would rise sharply for at least the next two years.
The warning, paired with a muted near-term sales outlook and more losses in its Reality Labs division, triggered investor concern that AI investments aren't leading to corresponding revenue gains in the tech space.
The Meta move in turn weighed on shares of Big Six peers Microsoft (MSFT) and Alphabet (GOOG) , which report after the close of trading on April 25, as well as Nvidia (NVDA) and Amazon (AMZN) .
Meta (META) posted impressive first-quarter earnings, with early artificial-intelligence investments helping drive engagement on some of its key platforms, such as Instagram, and powering a 27% increase in overall revenue, which came in at $36.5 billion.
The group's bottom line of $4.72 a share was also well above Wall Street forecasts, and CEO Mark Zuckerberg struck a bullish tone during his follow-up call with investors.
He also cautioned, however, that Meta would transition from it had called a "year of efficiency" to what he deemed a "multiyear investment cycle," which will see big increases in expenses and capital spending before its major AI projects can start generating sales.
"As we're scaling [capital expenditures] and energy expenses for AI, we'll continue focusing on operating the rest of our company efficiently," Zuckerberg told investors. "But realistically, even with shifting many of our existing resources to focus on AI, we'll still grow our investment envelope meaningfully before we make much revenue from some of these new products."
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"I think it's worth calling that out that we've historically seen a lot of volatility in our stock during this phase of our product playbook where we're investing in scaling a new product, but aren't yet monetizing it," he added.
"We saw this with Reels, Stories as news feed transitioned to mobile and more, and I also expect to see a multiyear investment cycle before we fully scale Meta AI, business AIs and more into the profitable services I expect as well."
Meta reports a muted revenue outlook
Meta still said it saw current-quarter revenue rising 18% from a year earlier to between $36.5 billion and $39 billion. But that tally missed Wall Street forecasts by around 1.5%.
Coupled with a boost in overall expenses, which were pegged between $96 billion and $99 billion this year, and a capital spending forecast in the region of $35 billion to $40 billion, and investors' reaction to the newly minted outlook was significant.
Meta shares were marked 16% lower in premarket trading to indicate an opening bell price of $415.38 each, a move would still leave the stock with a year-to-date gain of around 17.4%.
Meta shares once shed $232 billion in a single session, back on Feb. 3 2022, when it warned that privacy changes put in place by Apple (AAPL) would hammer its near-term ad sales forecasts.
Related: Analysts revise Facebook parent Meta stock price targets before earnings
Analysts, as well, were quick to revamp their Meta price targets and stock ratings on the back of the changing narrative, which also includes difficult year-on-year revenue comparisons and elevated Federal Reserve interest rates.
Barclays analyst Ross Sandler, who lowered his Meta price target by $30 to $520 a share, called the group's plans an "Investment Cycle With No Revenue" in his Thursday report, while Citigroup's Ronald Josey cut his target by $40 to $590.
Goldman Sachs analyst Eric Sheridan, however, affirmed a buy rating on Meta, even as he trimmed his price target by $55 to $500 a share. The analyst noted that faster stock buybacks could soften the blow of a drop in earnings-per-share estimates over the coming quarters.
The median price target on Meta now sits at $535 a share, down from $550 prior to the April 24 after-the-bell earnings report, with a low of $480 from JP Morgan and a high of $570 from RBC Capital Markets.
AI investments come with big costs
The key factor in much of the Wall Street commentary was the increase in costs tied to building and monetizing an AI-powered business strategy.
"Meta's earnings report reaffirmed that AI is a multiyear investment cycle," said KeyBanc Capital Markets analyst Justin Patterson, who lowered his price target on the group by $80 to $475 a share, following last night's update. He affirmed an overweight rating on the stock.
"Coupled with tougher comps that are causing revenue to decelerate, we see more concern over 2025 earnings and free cash flow," he added.
But he said that "while the investment cycle may remain a near-term overhang, we still see Meta as a normalized 10%+ grower with competitive durability."
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JMP Securities analyst Andrew Boone agrees, arguing that Meta is "well positioned to benefit from AI increasing engagement and advertising efficiency" from its platforms. But he also conceded the "difficulties of buying a stock in the early stages of an investment cycle."
"With catalysts around new recommendation architecture, generative AI creative tools for advertisers, and Generative AI agents further out, we think growth is sustainable despite more difficult comps," Boone said.
"We are maintaining our market outperform rating, though lowering our price target to $525 from $550."
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