Vibes, META’s next-generation AI creation tools and content experience, is gaining traction. The company is using Meta AI (currently used by more than one billion people) to boost user experience. Business AI is also gaining traction with more than one billion active threads between people and businesses across its messaging platforms.

However, rising expenses related to investments in developing more advanced models and AI services are expected to keep margins under pressure. The Zacks Consensus Estimate for Family of Apps’ operating income is pegged at $29.78 billion, indicating 5.1% year-over-year growth. The Reality Labs business continues to report losses, which doesn’t bode well for META’s fourth-quarter results. The consensus mark for Reality Labs’ loss is pegged at $6.31 billion, wider than the year-ago quarter’s loss of $4.97 billion.

META shares have dropped 0.2% in a year, outperforming the Zacks Computer & Technology sector’s appreciation of 28.4%. Shares have underperformed Alphabet and Amazon but outperformed Snap. In the trailing 12-month period, Alphabet and Amazon shares have appreciated 70.9% and 1.6%, respectively, while Snap shares have declined 29.8%.

Meta Platforms’ current valuation is stretched, as suggested by the Value Score of C.

In terms of the forward 12-month price/sales, META is trading at 6.98X, higher than the Zacks Internet Software industry’s 4.58X, Snap’s 1.94X and Amazon’s 3.19X.

AI is heavily dependent on data, of which META has a trove, driven by its more than 3.54 billion daily users, including 3 billion monthly actives on Instagram and 150 million daily actives on Threads. The company has a strong pipeline of ad supply opportunities on both Threads and WhatsApp Status over the long term.

However, Meta Platforms is spending heavily on AI research, models and infrastructure, as well as future products from Reality Labs. The company now expects 2025 capital spending between $70 billion and $72 billion compared with the previous guidance of $66-$72 billion range. For 2026, META expects significant growth in capital expenditure in dollar terms compared with 2025. Growth in operating expenses is expected to be substantial due to higher infrastructure costs and employee compensation costs.

Although these investments are expected to boost META’s prospects over the long term, a challenging macroeconomic environment, regulatory issues (in the European Union and the United States) and stiff competition in the ad market are major headwinds for META’s prospects.

META’s use of AI across its platforms bodes well for its user engagement. This, along with an improved recommendation tool, continues to help advertisers in ad targeting, thereby driving top-line growth. Meta Platforms is spending heavily on expanding AI infrastructure, which bodes well for future prospects. However, near-term prospects are challenging due to stiff competition in the ad space and higher expenses related to AI infrastructure as well as services. These factors, along with a stretched valuation, make the stock risky ahead of fourth-quarter 2025 earnings.

Meta Platforms currently has a Zacks Rank #3 (Hold), which implies that investors should wait for a more favorable point to accumulate the stock. You can see the complete list of today’s Zacks #1 Rank stocks here.

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Note: Sheraz Mian heads the Zacks Equity Research department and is a well-regarded expert of aggregate earnings. He is frequently quoted in the print and electronic media and publishes the weekly Earnings Trends and Earnings Previewreports. If you want an email notification each time Sheraz publishes a new article, please click here>>>

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