Like many other technology companies, Meta Platforms, Inc. (NASDAQ: META) has been investing heavily in artificial intelligence (AI).
Together with the release of its financial results for fiscal year 2025 (FY2025), the company outlined plans for even larger AI-related spending in 2026.
Although Meta’s core advertising business continues to generate strong cash flows, the company’s rising capital intensity has shifted the investment debate.
Now, the question is whether Meta’s valuation still offers compelling upside, or has its ambitious AI strategy been priced in.
Performance Snapshot
Meta’s recent financial performance shows continued strengthening of its core business.
In FY2025, total revenue grew 22.2% to US$201.0 billion with most of the revenue coming from the Family of Apps (FoA) segment.
FoA, which consists of Facebook, Instagram, Messenger, and WhatsApp, generated US$198.8 billion in revenue in FY2025, up 22.4%, thanks to improvements in user-engagement and advertisement-targeting.
The remaining US$2.2 billion of Meta’s revenue comes from the Reality Labs (RL) segment, which only grew by 2.8%.
Although Meta’s operating cash flow surged 26.8% year on year to US$115.8 billion, free cash flow dipped 16.3% to just US$43.6 billion because of increased capital expenditure.
As the company expanded its computing infrastructure to support its AI initiatives, capital expenditure surged 87.1% to US$69.7 billion.
Despite elevated AI spending, Meta maintained strong financial stability, holding US$81.6 billion worth of cash, cash equivalents, and marketable securities as of 31 December 2025.
This compares with US$58.7 billion in debt.
Additionally, the company continued to return capital to shareholders through quarterly dividends of US$0.52 per share, bringing total dividends for FY2025 to US$2.10 per share.
Cost of Staying Competitive
It is increasingly clear that AI is now central to Meta’s long-term strategy.
To stay ahead, Meta has guided for US$115 billion to US$135 billion in capital expenditure for 2026, doubling from 2025’s level.
Meta has also designed its own AI chips, and is attempting to build frontier AI models.
Although this allows Meta greater control over performance and costs in the long-run, it also increases near-term capital intensity.
Mark Zuckerberg, Chief Executive Officer of Meta, has stated that such aggressive AI investments are required in order to win this competitive AI race and to support his mission of “building personal super intelligence”.
Meta’s AI spending is no longer incremental, but structural in how the company plans to compete going forward.
Reasons for Optimism
From a positive point of view, Meta’s AI investments are closely tied to its core business.
Currently, AI has improved Meta’s advertising targeting, user engagement, and content recommendation, which directly supports revenue growth.
Few companies can match Meta’s scale of user data, giving it the advantage in training and deploying AI models.
Its strong balance sheet and ability to generate operating cash flow also provide the flexibility to fund its AI investments without suffering undue financial stress.
For long-term investors, the mix of durable cash flow and AI-driven optionality remains compelling.
The Trade Offs
However, the investment risks are becoming harder to ignore.
With capital expenditure rising sharply, Meta’s free cash flow growth is no longer guaranteed, even with strong earnings.
And as Meta continues growing, the margin of error shrinks and it becomes more difficult to bounce back from mistakes.
Similarly, other technology megacaps are investing aggressively in AI infrastructure, raising the risk of industry-wide overcapacity and lower returns on capital.
Meta’s past experience with the Metaverse also serves as a reminder that not all of its investments can generate attractive returns.
It is no longer a question of whether Meta can afford to spend on AI investments, but whether the returns on the investments justify higher capital intensity.
Current Valuation
Meta is not trading at distressed multiples. The market appears to recognise the strength of its advertising business.
As a result, future growth in Meta’s stock price is likely to depend more on its execution than just multiple expansion.
If its AI investments continue to enhance engagement and monetisation without materially eroding margins, Meta’s valuation could still prove attractive.
Otherwise, upside potential may be limited as higher spending weighs on its free cash flow.
Get Smart: Follow the Cash
With all that said, Meta’s AI strategy is bold but strategically rational.
However, ambition alone does not create shareholder value.
As spending accelerates, investors should judge the company’s success by free cash flow and capital efficiency.
Until results give justification for its level of investment, caution deserves more weight than optimism.
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Disclaimer: Charlyn T. does not own any shares in Meta.
