Meta's AI-Driven CapEx Surge: A Strategic Bet on Long-Term Dominance in the Generative AI Era

Meta Platforms (META) is embarking on one of the most audacious capital expenditure campaigns in corporate history. By 2025, the company has raised its CAPEX guidance to $64–72 billion, a 20% jump from its previous range of $60–65 billion. This surge is not just about building data centers—it is a calculated gambit to secure a dominant position in the generative AI race. The question for investors is whether this aggressive spending aligns with Meta's long-term revenue potential and whether the stock remains undervalued despite its soaring expectations.

The AI Infrastructure Bet: Scale as a Strategic Advantage

Meta's CAPEX surge is concentrated on AI-specific infrastructure, including the construction of two flagship superclusters: Prometheus in Ohio and Hyperion in Louisiana. Prometheus, set to debut in 2026, will house 600,000 NVIDIA H100 GPUs, while Hyperion could expand to 5 gigawatts of compute power by 2027. These facilities are designed to rival OpenAI's and Google's AI infrastructure, enabling Meta to train larger models and deploy AI at scale.

The company is also investing in custom silicon (MTIA chips), advanced cooling systems, and a hybrid energy strategy (6.5 gigawatts of solar/wind and a 20-year nuclear deal in Illinois). These moves reflect a vertically integrated approach to AI infrastructure, reducing dependency on third-party providers and ensuring cost efficiency. For context, Meta's Q1 2025 CAPEX already hit $13.69 billion, underscoring the pace of its investments.

AI as a Revenue Multiplier: From Ad Optimization to New Business Models

Meta's AI strategy is not purely speculative. The company is already leveraging AI to enhance its core advertising business. The Generative Ads Recommendation Model (GEM), for instance, has improved ad conversion rates by 5% on Reels and increased time spent on platforms like Instagram (24%) and Threads (35%). These gains directly translate to higher ad revenue per user, a critical metric for a company with 3.8 billion monthly active users.

Beyond ads, Meta is monetizing AI through its Llama series of open-source models, which it licenses for free to build an ecosystem of developers and partners. This "ecosystem dominance" play mirrors Microsoft's Azure-AI strategy, where infrastructure and model access create sticky partnerships. Additionally, Meta is exploring AI-powered hardware (e.g., Ray-Ban Meta glasses) and enterprise tools, which could unlock new revenue streams.

Financial Resilience: Can Meta Afford This?

Critics argue that Meta's CAPEX surge risks eroding its 40%+ operating margins. Reality Labs, for example, burned $4 billion in Q1 2025 alone. However, Meta's financials suggest it can sustain this pace. In Q1 2025, the company generated $24.03 billion in operating cash flow and $10.33 billion in free cash flow. Its debt-to-equity ratio (0.27x) and current ratio (2.66x) remain robust, indicating ample liquidity.

Moreover, Meta is extending the useful lives of servers to reduce depreciation costs and has secured long-term energy deals to hedge against volatility. Analysts project $100 billion in annual cash flow by 2026, providing the firepower to fund both CAPEX and shareholder returns.

Valuation: Undervalued or Overhyped?

Despite the aggressive spending, Meta's stock appears undervalued by several metrics. Its P/E ratio of 26.9x is below the tech sector average of 35.4x, while its EV/Revenue of 10.4x suggests a reasonable multiple relative to peers. Analysts have raised price targets to $750–$800, citing AI-driven growth in ad monetization and user engagement.

Morningstar estimates a fair value of $770 per share, and Simply Wall St projects $748.46. While the DCF model (short-term) suggests overvaluation, longer-term projections (10-year) imply a 38% upside. This divergence reflects the market's uncertainty about AI monetization timelines but also underscores Meta's potential to outperform.

Risks and Realism

Meta's AI bet is not without risks. Regulatory scrutiny (e.g., the EU's Digital Markets Act) could limit monetization of AI tools, and unprofitable ventures like Reality Labs remain a drag. Additionally, the AI arms race is costly—Microsoft and Alphabet are projected to spend over $300 billion collectively on AI infrastructure in 2025.

However, Meta's scale and financial flexibility position it to endure these challenges. Its strategy of combining open-source models with proprietary infrastructure creates a dual advantage: attracting developers while retaining control over compute resources.

Investment Thesis

For long-term investors, Meta's AI-driven CAPEX surge represents a strategic bet on the future. The company is leveraging its financial strength to build a self-sustaining AI ecosystem, with near-term gains in ad optimization and long-term upside from enterprise tools and hardware. While the stock's P/E and PEG ratios suggest modest undervaluation, the key metric is whether Meta can execute its vision without sacrificing profitability.

Given its strong cash flow, aggressive CAPEX, and alignment with the AI megatrend, Meta offers a compelling case for investors willing to tolerate short-term volatility. The company's ability to turn AI into a revenue engine—and not just a cost center—will determine whether its $1.8 trillion valuation is justified.