Meta Platforms Inc (NASDAQ:META) stock fell 2.02% (As on March 6, 11:11:37 AM UTC-4, Source: Google Finance) after Arete downgraded the company to Neutral from Buy with a price target of $676, down from $732. The firm says the company is “lagging” on AI monetization and its “surging” investments will lead to margin declines. The stock suffered a post-earnings selloff due to the panic related to aggressively increasing AI-related CAPEX. Thus, META currently trades almost at exactly the same price as it did in mid-December.

The company’s Q4 earnings were stellar, but with a significant increase in capital investments, Meta’s historically strong ROIC is at risk. The management sees potential to improve value for digital advertising clients by adding new AI-powered features for improved targeting, but the competition in generative AI models has become so intense, and Meta doesn’t look like the most powerful one in this domain. Meta’s digital advertising business is already quite mature, and it is difficult to expect skyrocketing profitability from the legacy segment because of its scale and likely increasing competition for marketing budgets with LLMs.

Moreover, Meta released its latest quarterly earnings on January 28th, delivering another dual beat against consensus estimates. Revenue growth was solid during the quarter with a 23.8% YoY increase, while the adjusted EPS expanded from $8.02 to $8.88. It was a quality EPS expansion, as it was underpinned by almost a 10% increase in EBITDA, which reflects improved operating efficiency.

While Q4 performance was extremely strong with big positive surprises in terms of both revenue and EPS, there is an elephant in the room, which is the management’s initiative to significantly increase capital investments in FY2026. Meta’s annual CAPEX already reached almost $70 billion in FY2025, which is almost a five-fold increase compared to FY2020. And even this huge annual CAPEX of $70 billion last year is far from peak, because the management said during the earnings call that they expect FY2026 CAPEX to be between $115 billion and $135 billion. The midpoint is $125 billion, which is a 79% increase compared to FY2025 and a 3.4x increase compared to FY2024. Further, given that the management plans to increase investments in CAPEX by $125 billion in FY2026, it will be quite reliable to say that capital employed will increase by at least $100 billion over the next year. In relative terms, it will be approximately a 30% increase in capital employed. Therefore, to prevent ROIC compression, Meta’s operating profit should also demonstrate the same growth in FY2026.