Meta Shares Slide 10% (Here’s Why Investors Panicked)

Meta Falls 10% as Strong Revenue Growth Overshadowed by Profit Concerns and Softer Guidance

Meta’s latest earnings were a reminder that even the strongest names in the market aren’t immune to shifts in sentiment. With the Mag 7 trading at record highs, expectations were sky-high heading into the quarter and when results come in as anything less than stellar, the market reacts fast. Meta’s share price fell around 10%, a sharp move for a company of its size, after delivering what was actually a solid but not spectacular set of numbers.

Revenue grew 26% year over year to USD 51.24 billion, supported by a 14% lift in ad impressions and a 10% increase in average ad prices. In simple terms, more people are seeing ads across Meta’s platforms, and each view is generating more revenue than it did a year ago. Reality Labs Meta’s virtual and augmented reality division posted USD 470 million in revenue, up from USD 270 million last year. While that’s strong growth, it still represents only a small slice of Meta’s overall business and remains in its early stages of scale.

Despite Meta delivering strong top-line growth, the sharp sell-off came down to profitability and guidance rather than revenue. A few key catalysts stood out.

One-Time Tax Hit and Rising Costs Spark Profit Concerns

First, Meta recorded a one-time, non-cash tax charge of USD 15.9 billion linked to new U.S. tax legislation. Excluding this accounting adjustment, net income would have been around USD 18.6 billion with earnings per share of USD 7.25, representing roughly 19% earnings growth. However, on paper, reported net income fell 83%, and that headline figure triggered a wave of algorithmic and sentiment-driven selling across the market.

Beyond the tax impact, the real concern was the pace of expense growth. Total costs and expenses rose 32% year over year to USD 30.7 billion, outpacing revenue growth. Research and development spending climbed 35% as Meta doubled down on AI infrastructure, generative models, and its Superintelligence Labs initiative. General and administrative expenses nearly doubled, reflecting higher legal, compliance, and regulatory costs. On top of that, Meta continues to deploy large amounts of capital into data centers and compute capacity, which is starting to weigh on margins and free cash flow.

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Meta Bets Big on AI Infrastructure, But Investors Question If Returns Will Justify the Spend

Because of this surge in spending, Meta’s operating margin slipped from 43% to 40% over the year. It’s not an immediate red flag, but it does raise questions about whether the company might be edging into an overspending phase. For these heavy investments to create long-term value, they’ll need to start delivering returns that exceed the company’s cost of capital; otherwise, profitability could remain under pressure.

The byproduct of this aggressive investment cycle is visible in the cash flow statement. Despite generating a record operating cash flow of USD 30 billion, free cash flow fell to USD 10.6 billion, mainly due to the sharp increase in capital expenditure. In other words, Meta is earning plenty of cash, but much of it is being reinvested back into infrastructure, AI development, and hardware capacity a move that could pay off down the line but limits short-term flexibility and cash returns to shareholders.

What does the future look like for Meta

Looking ahead to the rest of 2025 and into 2026, Meta’s outlook suggests that elevated spending will remain a key theme. The company raised its full-year capital expenditure guidance to between USD 70 billion and USD 72 billion, reflecting ongoing investment in AI infrastructure and data capacity. Management noted that compute demand continues to rise sharply, and the CFO indicated that these aggressive levels of investment are likely to continue into next year, meaning we could see more quarters like this where spending outpaces revenue growth.

That said, it’s worth noting that not all of these expenses are permanent. A portion of the recent cost increase stemmed from regulatory and compliance-related changes, which may not carry forward at the same level. This means some near-term cost pressures could ease over time, allowing Meta’s profitability to stabilise once the heavy infrastructure build-out begins to mature and generate returns.

The Investors’ Takeaway for Meta

The takeaway for Meta is that there’s no structural weakness in the business. The real focus now is on its capital expenditure cycle and whether those heavy investments can translate into long-term growth. The concern isn’t the spending itself, it’s what happens if elevated expenses continue without a meaningful lift in operating margins or top-line revenue.

For investors holding the Magnificent Seven, this serves as a reminder that when valuations are stretched, even small disappointments can trigger sharp pullbacks. Market sentiment is already pricing in perfection, leaving little room for error. With Meta signalling higher expenses in 2026, the company appears to be entering a lower-margin, high-investment phase that could pay off handsomely if execution remains strong, but also one that demands patience and discipline from investors.