After missing Q3 earnings forecasts on Wednesday (29 October), Meta (NASDAQ:META) is seeing its share price fall. But the entire stock market might also have reason to be nervous.
CEO Mark Zuckerberg told analysts that the company’s artificial intelligence (AI) investments are likely to work. Investors however, don’t seem to be entirely convinced.
Earnings results
Meta’s revenues for Q3 came in at $51.2bn – 26% higher than a year ago – but earnings per share crashed 82% to $1.05. That’s obviously well short of what analysts were expecting.
One reason for this is a one-off tax cost coming from the One Big Beautiful Bill. But given that this isn’t an ongoing expense, it’s probably not a huge concern for investors.
The bigger issue is the company’s AI costs. These more than doubled in Q3 compared to the previous year – significantly outpacing revenue growth – and this looks set to continue.
Meta’s betting on superintelligence (the point where machine thinking surpasses humans). But it’s a lot of cash up front for uncertain future returns and that’s a major risk.
AI investing
Investors have started to wonder whether AI stocks are in a bubble. And a big question is whether the cash Meta and others are investing is ultimately going to be worth it.
According to Zuckerberg, it’s almost certain it will be. The worst-case scenario, according to the Meta CEO, is that the company takes time to grow into its additional capacity.
In Zuckerberg’s view, the bigger risk is not being prepared. The question isn’t whether the firm will need the infrastructure it’s been building, it’s when and it can’t afford to be late.
That might be right, but investors don’t seem to be buying it. And if that sentiment shifts across to the wider stock market, things could get interesting pretty quickly.
Stock market
Defence stocks and shares in GLP-1 companies have done very well over the last 12 months. But the stock market as a whole has become increasingly concentrated around AI.
That means there’s a lot hanging on the growth of the industry. And realistically, this depends on the likes of Meta, Alphabet, Amazon, and Microsoft continuing to spend heavily.
If these firms decide to try and do more with less, or there isn’t enough growth in the economy to justify the spend, things could unravel dramatically. And this is something to be aware of.
Zuckerberg thinks the chances of this are close to zero. But I’m not convinced and investors are clearly starting to show signs of nervousness at the scale of the outlay.
Have we been here before?
Meta’s Reality Labs project continues to burn through cash and this means its AI investments have to be considered a speculative risk. But I actually think the company’s less vulnerable than the wider stock market.
The core advertising business continues to put up impressive growth numbers. So I think it’s a good stock to consider for investors looking to boost their AI exposure.
With the market as a whole though, I’m not so sure. If AI growth falters, I’m not convinced there’s enough growth elsewhere to prevent a crash.
