The huge cheques

Meta Platforms Inc.

is writing to support its

artificial intelligence ambitions

are reminding some investors of the massive Metaverse outlays that

crippled the stock

just a few years ago.

Facebook’s parent posted results last week that beat expectations on key metrics. But Wall Street’s focus was on capital expenditures, which the company said would be as much as US$72 billion this year and “notably larger” in 2026. Then, on the earnings call, chief executive

Mark Zuckerberg

downplayed concerns that Meta might be over-spending on things like its Superintelligence Labs group, saying “it’s the right strategy to aggressively front-load building capacity.”

Now Meta shares just posted their worst four-day run since November 2022, falling almost 17 per cent and wiping out US$307 billion in market value. Not coincidentally, the 2022 selloff was also triggered by investors questioning its spending plans, ultimately sending the stock down 77 per cent from a 2021 peak.

“This feels like a return to Meta’s old days of overspending on things that are frivolous or which don’t have appropriate return demands tied to them,” said Tiffany Wade, senior portfolio manager at Columbia Threadneedle Investments, which has about US$714 billion in assets. “Investors are losing patience.”

The stock rose 0.2 per cent on Wednesday.

Of course, even with the latest tumble, Meta’s stock remains up 7.5 per cent this year. That’s because until very recently, spending large sums on AI wasn’t seen as a negative. In fact, companies were rewarded for it because it showed they were staying competitive in the evolving tech landscape.

Zuckerberg has long touted how AI is leading to improved ad targeting and engagement. But with spending continuing to rise, investors are getting skittish about the outlays without more concrete signs of the payoffs.

Meta didn’t respond to a request for comment.

While AI is less of a long-shot than the Metaverse was, “you can draw some parallels between the spending on Superintelligence and Reality Labs,” Wade said. “Both are long-dated projects that don’t have an immediate payback and where the ultimate return is unclear.”

Wade isn’t the only Wall Street pro who sees the connection. Jason Helfstein, an analyst at Oppenheimer, downgraded Meta’s stock in the wake of the earnings report, writing that the “significant investment in Superintelligence despite unknown revenue opportunity mirrors 2021/2022 Metaverse spending.”

Meta

isn’t the only example

of investors getting cold feet about AI spending. Microsoft Corp. also fell on its results, although the drop was milder as investors see a clearer path from spending to growth in its Azure cloud-computing business. Unlike Microsoft — to say nothing of Amazon.com Inc. or Alphabet Inc., which rallied on their results — Meta is missing an enterprise-focused business like Azure that could benefit from AI’s proliferation.

“There’s a

real lack of diversification

in the business model,” said Stefan Slowinski, global head of software research at BNP Paribas, who was the only analyst with the equivalent of a sell rating on the stock in the days going into the results. “It has failed to expand into any real enterprise business, and we have the strategic error of the Metaverse.”

Meta’s return on invested capital was 25 per cent in the third quarter, a notable drop from the previous quarter, which set a record at nearly 32 per cent. Even with the drop, its return remains well above levels seen in 2023, when the company’s metaverse ambitions were driving higher spending.

“The only way it can monetize hundreds of billions of capex is through additional advertising,” Slowinski said. “I’m sure it will be able to do this over time. But it will take time.”

Spending is just one aspect of Meta’s financials that gives investors pause. There’s also the use of off-balance-sheet debt and a large write-off, which widened the gap between its net and pro-forma earnings, Bank of America wrote in a note to clients on Nov. 2. Such a trend “can highlight deteriorating earnings quality, and has historically been accompanied by weaker returns,” according to the bank.

Meanwhile, other parts of Meta’s outlook are encouraging. Revenue is seen growing 21 per cent this year and is expected to remain above double-digits through 2028. Net earnings growth, which was flat in 2025, is projected to be above 25 per cent next year.

In addition, Meta’s stock market valuation makes it a bargain compared to other Big Tech stocks. The shares trade at 19 times estimated earnings, a discount to their 10-year average. That makes Meta by far the cheapest of the Magnificent Seven stocks. Its multiple is even lower than the S&P 500 Index’s 23.

The move down in Meta’s stock is “baffling,” said David Katz, who oversees about US$1.4 billion as chief investment officer at Matrix Asset Advisors. To him, it presents a classic buying opportunity.

“The Metaverse was a bet that didn’t pan out,” Katz said. “There is a much clearer roadmap to leveraging AI for market advantages and better profitability. Outside of it being a boatload of money without much accountability for Zuckerberg, that’s where the similarities stop.”

—With assistance from Subrat Patnaik and David Watkins.

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Bloomberg.com