Meta's Stock Volatility: Can AI-Driven Growth Justify Its Valuation?
19min readMeta Platforms (META) has been a barometer of tech sector sentiment in 2025, its stock price oscillating between optimism over its AI ambitions and skepticism about execution risks. After reaching an all-time high of $740.91 in February, shares have retreated amid regulatory headwinds and macroeconomic uncertainty. Yet the company's Q2 2025 financial guidance—projecting revenue of $42.5 billion to $45.5 billion—suggests its AI strategy is bearing fruit. The question for investors is whether this momentum can outweigh lingering risks and justify its current valuation.
The AI Inflection Point: Growth vs. Reality
Meta's recent performance hinges on its transition from a social media giant to an AI-first company. In Q1 2025, advertising revenue surged 16% year-over-year to $41.4 billion, driven by AI tools that boosted advertiser efficiency. Platforms like WhatsApp and Facebook now host nearly 1 billion monthly active users on its AI platform, while AI creative tools have increased ad conversion rates. This shift is critical: advertising still accounts for over 95% of Meta's revenue, but AI's role in optimizing that revenue stream is undeniable.
The $14.3 billion acquisition of Scale AI, a data labeling leader, underscores Meta's ambition. Scale AI's CEO now leads a new “superintelligence unit,” aiming to accelerate training of Meta's Llama 4 model. While this move could solidify Meta's AI infrastructure, it also reflects a costly bet. Meta's capital expenditures for 2025 are projected to hit $64 billion–$72 billion, up from $20 billion in 2024, as it races to build data centers and servers for AI.
The Double-Edged Sword of Reality Labs
Meta's Reality Labs division—responsible for virtual and augmented reality—continues to weigh on profitability. Q1 2025 losses hit $4.2 billion, and the division's path to breakeven remains unclear. While hardware sales like the Ray-Ban Meta glasses have tripled, the broader metaverse vision faces competition from Apple and technical hurdles. The labs' struggles highlight a broader tension: Can AI-driven ad growth offset the costs of long-term bets?
Regulatory risks add another layer. The European Commission's ruling that Meta's “subscription for no ads” model violates the Digital Markets Act (DMA) could force changes in Q3 2025. While Meta plans to appeal, compliance costs and user dissatisfaction in the EU could dampen revenue.
Valuation: A Bulls vs. Bulls Debate
Analysts are divided but increasingly bullish. The average price target of $709.66 implies a 3.9% upside from recent levels, while Oppenheimer's raised target of $775 reflects confidence in ad growth. Yet GuruFocus estimates a 21% downside using historical multiples, arguing that Meta's valuation exceeds its growth trajectory.
Technical traders note resistance at $700 and $740, with support near $590. A golden cross in late May 2025—a 50-day moving average crossing above the 200-day—suggests a bullish trend, but volatility remains high (beta of 1.38).
Investment Takeaways
- Buy the Dip, But Beware: The stock's 22.8% revenue beat in Q1 and strong ad metrics make it a compelling entry point if macro risks ease.
- Monitor AI Competitors: Google's Gemini and OpenAI's GPT-5 threaten Meta's lead. A perception that Llama 4 lags could pressure shares.
- Reality Labs' Pivot: Success in hardware (e.g., Ray-Ban glasses) or metaverse monetization could redefine valuation.
Final Analysis
As the July 23 earnings report approaches, watch for signals on ad pricing, Reality Labs' progress, and AI's contribution to revenue. Historically, buying META on earnings announcement days and holding for 30 days has delivered strong returns, as backtests from 2020 to 2025 show this strategy capitalized on positive momentum from earnings releases.
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