Is Meta (META) Undervalued Amid AI Disappointment and Market Volatility?

The stock of Meta Platforms (META), down 21% year-to-date, has drawn scrutiny as investors weigh its prospects amid a mix of AI-driven growth, regulatory headwinds, and margin pressures. The company's Q3 2025 earnings report-while showcasing robust revenue growth-highlighted a stark disconnect between top-line performance and bottom-line expectations, raising questions about its valuation and long-term sustainability.

Strong Organic Growth, But Earnings Miss Stings

Meta reported Q3 2025 revenue of $51.24 billion, a 26.2% year-over-year increase, driven by AI-powered ad targeting, rising video consumption, and improved user engagement according to industry data. Instagram Reels, for instance, reached a $50 billion annual run rate, underscoring the platform's dominance in digital content. However, GAAP earnings per share of $1.05 fell far short of analyst estimates of $6.70, marking an 84.3% miss. The gap was attributed to surging expenses, including infrastructure expansion, legal costs, and aggressive hiring in AI research as reported in the earnings release.

This divergence between revenue and profit reflects a strategic bet on AI and long-term innovation. CEO Mark Zuckerberg emphasized Meta's focus on "personal superintelligence for everyone," with significant investments in next-generation AI models and infrastructure slated for 2026 according to the company's earnings release. While such spending may dilute short-term margins, it positions the company to capitalize on AI-driven advertising and personalized services, which remain its core revenue drivers.

Defensible Margins, But Industry Comparisons Matter

Meta's operating margin for Q3 2025 stood at 40.0%, down from 43% in Q3 2024. This decline aligns with broader industry trends: the social media sector's trailing twelve months (TTM) operating margin is 33.16%, according to industry data. Despite the drop, Meta's margins remain above the sector average, a testament to its scale and ad-tech dominance. Analysts like Goldman Sachs and Mizuho have reiterated "buy" ratings, citing Meta's ability to maintain profitability even amid rising costs.

However, the company's gross margin of 40%-a 3-point decline from 2024-signals growing pressure from infrastructure and R&D expenses according to industry reports. With planned 2026 capital expenditures of $91 billion to fuel AI expansion as detailed in the company's SWOT analysis, investors must assess whether these investments will yield returns that justify the near-term drag on earnings.

Regulatory and Competitive Risks Loom Large

Meta's AI ambitions are not without risks. Regulatory scrutiny in the EU and U.S. could constrain ad revenues and profitability, particularly as data privacy laws evolve according to the company's earnings report. Additionally, the company's foray into energy trading to power its data centers-a move to secure stable electricity for AI operations-introduces operational complexity and potential cost volatility.

Competitively, Meta faces challenges from emerging AI platforms and TikTok's growing ad ecosystem as noted in industry analysis. Yet, its AI-driven ad tools, such as Advantage+, have already reduced lead costs for advertisers by 14%, demonstrating tangible value. The question is whether these innovations can offset regulatory and competitive pressures over time.

Valuation: A Tale of Two Narratives

Meta's valuation remains a contentious issue. While the social media industry's average P/E ratio stands at 27.92 according to industry data, specific metrics for Meta are not disclosed in the latest data. However, analyst price targets ranging from $825.05 to $920 suggest optimism about long-term potential. The stock's 21% decline may reflect market skepticism about near-term earnings, but it also offers a discount relative to its historical P/E and industry peers.

The PEG ratio, which adjusts for growth, is less clear. The broader internet software/services industry has a PEG of 2.33 in 2025 according to industry data, implying that growth expectations are priced in. For Meta, the key will be whether its AI-driven ad efficiency and user engagement can translate into earnings growth that justifies a premium multiple.

Conclusion: A Calculated Bet on the Future

Meta's investment case hinges on its ability to balance short-term margin pressures with long-term AI-driven growth. The company's revenue growth, defensible margins, and leadership in digital advertising provide a strong foundation. However, regulatory risks, competitive threats, and the capital intensity of AI infrastructure pose significant challenges.

For investors, the 21% decline in Meta's stock price may represent an opportunity-if they are willing to stomach near-term volatility for a company that is redefining the future of social media and AI. As Susan Li, Meta's CFO, noted, "Expense growth will outpace 2025 levels," but so too could the rewards for those who bet on its vision according to the company's earnings release.