Should You Buy Meta Platforms Stock on the Dip?

Sometimes, everything can be going well, only to fall apart in an instant. That's what happened last week with Meta Platforms (NASDAQ: META).

This "Magnificent Seven" stock was soaring almost 30% year to date on Oct. 29. However, that was before Meta provided its third-quarter update. The following day, the company's share price plunged 12%. Should you buy this once high-flying stock on the dip?

Behind Meta's sell-off

A steep stock decline would make sense if Meta's Q3 results had been dismal. But that wasn't the case. The company's revenue jumped 26% year over year to $51.2 billion. The consensus Wall Street estimate was for Q3 revenue of $49.4 billion.

At first glance, Meta's earnings may appear disappointing. The company reported earnings per share (EPS) of $1.05 based on generally accepted accounting principles (GAAP), down 83% year over year. However, this figure reflected a one-time, non-cash tax charge. On an adjusted basis, Meta's EPS was $7.25, better than the $6.69 expected by analysts.

So what was behind Meta's big sell-off? Many investors were not pleased that the company raised its full-year capital expenditures outlook to between $70 billion and $72 billion, up from its previous forecast of $66 billion to $72 billion. And they especially disliked that Meta CFO Susan Li said in the Q3 earnings call that the company expects capex "will be notably larger in 2026 than 2025" as it builds out artificial intelligence (AI) infrastructure.

The persistent drag on profits from Meta's Reality Labs segment, which focuses on augmented and virtual reality technology, remained an issue as well. While the segment's revenue soared 74% year over year to $470 million, its loss totaled $4.4 billion.

Image source: Getty Images.

The positive side of the story

Although the reaction to Meta's increased capex spending was overwhelmingly negative, CEO Mark Zuckerberg provided the positive side of the story in the Q3 earnings call. He explained that the company is scaling up a massive AI infrastructure to be ready for AI superintelligence (ASI).

Meta Superintelligence Labs (MSL) has assembled what Zuckerberg referred to as "the highest talent density in the industry." He acknowledged that there are different views on how long it will take to achieve ASI. However, Zuckerberg said, "I think it's the right strategy to aggressively front-load building capacity so that way we're prepared for the most optimistic cases."

What if it takes longer than hoped for ASI to become a reality? Zuckerberg said that Meta would use extra capacity to accelerate its core business. The worst-case scenario is that the company would need to slow down its addition of new infrastructure for a while while it grows into what it has already built.

The good news is that Meta's AI investments in its core businesses are paying off. For example, thanks to AI recommendation system improvements, user time on Facebook increased 5% in Q3 and 10% on Threads. Time spent watching videos on Instagram jumped 30% year over year.

Is Meta stock a buy on the pullback?

Zuckerberg summed things up by stating, "Taking a step back, if we deliver even a fraction of the opportunity ahead for our existing apps and the new experiences that are possible, then I think that the next few years will be the most exciting period in our history." He's probably right.

The big question, though, is: Can Meta deliver enough? How you answer that question will determine whether or not you view Meta stock as a buy on the pullback.

I think investing in Meta is a good idea. The stock isn't priced at an absurd premium, with shares trading at a forward price-to-earnings ratio of 24.6. That multiple isn't too steep, considering that Meta's adjusted earnings increased 20% year over year in Q3.

Maybe Meta's higher spending on capex will prove to be ill-advised. But Zuckerberg is correct that the company can always slow its build-out if needed. It can also use extra capacity for its internal applications. The downside isn't too bad, while the upside is tremendous. That's a bet worth taking, in my view.

Keith Speights has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.