The Factors Behind Meta's Stock Price Drop

Meta Platforms has experienced a sharp decline in its stock price over recent weeks, sparking concern among investors and analysts alike. Shares have fallen in six of the past seven trading days, erasing much of the gains Meta stock had accumulated this year. 

As of Friday, the social media giant is now considered the weakest performer among the so-called Magnificent Seven, a group of leading tech stocks.

The decline traces back to Meta’s third-quarter earnings report on October 29, which highlighted a significant increase in spending on artificial intelligence initiatives. Investors were taken aback by the ambitious AI investments, which include building data centers and expanding computing power to support advanced AI models. 

Following the report, Meta stock dropped 11%, with an additional 9% lost in subsequent trading sessions. The company also raised $30 billion through a bond sale last week, further adding to market concerns.

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AI Spending Raises Investor Concerns

While Meta’s advertising revenue continues to show strength, growing 26% in the third quarter, concerns over capital expenditure have weighed heavily on its stock price. 

Meta announced that it expects a notably higher level of spending next year compared to 2025. This year’s capital expenditure is projected at $71 billion, nearly matching last year’s total.

CEO Mark Zuckerberg’s vision includes creating advanced AI systems, sometimes described by analysts as “artificial superintelligence.” However, the timing and returns of such projects remain uncertain, prompting some to draw parallels to Meta’s costly investments in the metaverse, which hurt the stock in 2022.

Dan Salmon of New Street Research explained the difference, Meta’s current AI spending can potentially be repurposed for other business ventures, such as cloud infrastructure, whereas much of the metaverse investment would have been sunk costs if the project failed to gain traction. Despite this, the scale of spending has created caution among investors.

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Stock Market Indicators Signal Weak Momentum

Meta stock price has also suffered on technical grounds. On Friday, shares dropped more than two% to $604.84, marking a level not seen since early May. 

Its Relative Strength rating, a measure of recent stock performance against the broader market, plummeted from 89 three months ago to just 23. Meanwhile, the Accumulation/Distribution rating indicates that selling pressure has dominated buying activity in recent weeks.

Although Meta still holds a strong IBD Composite Rating of 82 out of 99, the drop in momentum signals that investors are closely monitoring the stock’s performance amid heightened uncertainty.

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Broader Market Context

The decline of Meta stock comes as other leading tech companies have fared better this year. Google parent Alphabet has gained 47%, Nvidia 36%, and Microsoft 17%. 

Even Tesla and Apple have modestly outperformed Meta, highlighting the relative weakness of the stock despite strong advertising fundamentals.

As Meta navigates its ambitious AI strategy, investors will be paying close attention to how the company balances spending with potential returns. The coming months will likely determine whether Meta stock stabilizes or continues to face pressure from cautious market sentiment.

FAQ

Why is Meta stock falling?

Meta stock is declining due to increased spending on artificial intelligence, high capital expenditures, and investor caution regarding the timing and returns of these investments.

How has Meta stock performed this year?

Meta stock is up only 4% year to date, making it the weakest performer among the Magnificent Seven tech stocks. Shares are also over 23% below the record high reached in mid-August.

Is Meta still profitable?

Yes. Meta’s advertising business continues to grow, with revenue increasing 26% in the third quarter. The concern is primarily about spending and future profitability.

How does Meta’s AI spending compare to past investments?

The AI investment is significant, comparable to the company’s metaverse spending in scale but with potentially more flexible applications. Analysts see differences in timing and potential returns.

What should investors watch next?

Investors should monitor Meta’s capital expenditures, progress in AI initiatives, technical stock indicators, and overall market sentiment to assess future performance.