No stock in the Magnificent 7 better illustrates the tension between AI ambition and investor patience than Meta Platforms. After raising its 2025 capital expenditure forecast to $72 billion and warning of "notably larger" spending in 2026, the stock has dropped 17% from its August highs. Yet according to Morningstar, Meta shares trade at a 24% discount to their $850 fair value estimate—making it one of the most compelling value opportunities in Big Tech.

The Spending That Spooked Wall Street

CEO Mark Zuckerberg has pursued AI with characteristic intensity. The company's investments span the entire artificial intelligence stack:

  • A $14 billion investment in Scale AI, including hiring the startup's CEO Alexandr Wang as Meta's chief AI officer
  • Massive data center construction to support training and inference for large language models
  • Development of custom AI chips to reduce dependence on Nvidia
  • Continued investment in Reality Labs, the metaverse division that has consumed over $50 billion since 2019

When Meta announced its capex guidance in October, investors who had bid the stock to record highs in August reversed course. The market's message was clear: show us the returns before asking for more capital.

The Bull Case for Meta

Contrarian analysts see the selloff as an opportunity. Morningstar's $850 fair value estimate implies significant upside from current levels, based on several factors the market may be underappreciating:

AI-enhanced advertising: Meta's core advertising business is already benefiting from AI integration. Machine learning improvements have enhanced ad targeting, reduced cost per impression for advertisers, and increased overall engagement across Facebook, Instagram, and Threads.

Reels monetization: The short-form video format that once threatened to cannibalize higher-margin content has matured into a revenue driver. Reels is now monetizing at rates that, while still below Feed, have improved dramatically from the product's early days.

"Demonstrating how that spending is boosting profits will be critical for Meta in 2026."

— Bloomberg Analysis

WhatsApp business services: The messaging platform with over 2 billion users remains under-monetized. Business messaging, payment services, and e-commerce integration represent substantial untapped revenue potential.

The Comparison Problem

Part of Meta's valuation challenge stems from unfavorable comparisons within the Magnificent 7. Alphabet's Google Cloud Platform has grown into a clear profit center, providing tangible evidence of AI monetization. Nvidia's revenue growth speaks for itself.

Meta's AI investments, by contrast, are harder to isolate in financial statements. The company doesn't break out AI-specific revenue, and the benefits flow through existing product lines rather than appearing as discrete new businesses.

Reality Labs: The Elephant in the Room

Any honest assessment of Meta's capital allocation must address Reality Labs, which has lost over $50 billion pursuing Zuckerberg's metaverse vision. The division continues to burn billions annually with no clear path to profitability.

Bulls argue the losses are bounded and declining as a percentage of overall company cash flow. The core advertising business generates sufficient profits to fund these bets without jeopardizing financial stability. Bears counter that the capital could be returned to shareholders or deployed in investments with clearer returns.

What 2026 Needs to Show

For the undervaluation thesis to play out, Meta must demonstrate progress on several fronts:

  • Advertising margin expansion: AI efficiency gains should begin flowing through to operating margins
  • Reality Labs loss reduction: Even without profitability, a credible glide path to lower losses would reassure investors
  • Clear AI product revenue: New monetization streams from AI assistants, business tools, or creator features would validate the spending
  • Capital return discipline: Continued buybacks and dividends signal management confidence in free cash flow generation

The Contrarian Bet

Meta represents a classic contrarian setup: a dominant franchise with proven monetization capabilities, temporarily out of favor due to spending concerns. The company generates roughly $60 billion in annual free cash flow even while making massive AI investments—a testament to the durability of its advertising engine.

The question is whether Zuckerberg's AI vision ultimately proves prescient or profligate. If Meta's investments position it as a leading AI platform company rather than just a social media advertising firm, today's prices will look like a bargain. If the spending fails to generate adequate returns, patient investors will have funded another expensive lesson in technological overreach.

For value-oriented investors willing to bet on Big Tech's most controversial capital allocator, the 24% discount to fair value represents a calculated wager that the spending paradox eventually resolves in shareholders' favor.