Sticking With This Meta Price Target as Earnings Lead to Selloff

With our game plan shared, let’s turn our focus to Wednesday night’s quarterly results and updated outlook from Meta (META).

Before we get into the nitty gritty of it all, we will share that despite the selloff we are seeing in META shares on Thursday morning, we are largely seeing price target increases for the share. The likes of JPMorgan Chase (JPM), UBS, BofA, Wells Fargo (WFC), Citigroup (C) and others are lifting their targets to $850 to $995 from $810 to $920. That’s not a complete list, but it is one that captures Wall Street’s focus more on the progress at Meta on AI than on the negative cash flow reported on Wednesday night.

For us at the Portfolio, we acknowledge the improved progress with AI at Meta, and as we shared on Thursday morning, we are very pleased to see another quarter of more than 20% growth for the closely watched Family Average Revenue per Person (FARP) metric. Our view has been that given the slower rate of growth for the number of Family Daily Active People (FDAP), which closed Q3 2026 at 3.64 billion, up from 3.54 billion in the year-ago quarter and 3.60 billion exiting Q2 2026, the focus at Meta remains one of more effectively monetizing that user base. The more than 20% rate of growth in the FARP metric compared to less than 3% year-over-year gains in the FDAP count, tell us it is succeeding.

As Meta continues to flex monetization across its platform of apps, the combination of improving pricing and internal use of AI to streamline costs bodes well for margins over time. Average price per ad rose 14% in the quarter, and management shared that AI is boosting conversions. It also shared the company is moving its content-understanding systems onto its own Muse models. In offline tests, these cut per-unit processing costs by more than 80% across Instagram, Threads, Facebook and Ads.

Outside of Meta’s internal use of AI, the company shared nearly 10 million advertisers used Meta’s generative AI creative tools, and video-generation adoption grew 25% sequentially. Advertisers who adopted the AI Business Assistant’s recommendations saw about 5% more conversions at the same cost and raised ad spend 9%. We see that as an incentive that will further drive adoption and usage of those AI tools.

On the topic of Muse, we’ve discussed recent SensorTower metrics that point to brisk adoption and favorable continued usage metrics, especially compared to other apps. During the earnings call, Meta shared that, per its own findings, Muse was set up by more than 10 million U.S. and Canadian users in six weeks, about 25% of whom use it daily; more than a quarter use it to shop, with average purchases above $200. No word was mentioned on subscription-related revenue, but as we’ve pointed out to you, subject to subscription conversion rates on those 3.64 billion daily users and annual subscription costs, it has the potential to be a big revenue driver for the company. There is also the revenue cut that Meta will get on transactions carried out by Muse, with those funds being paid by businesses, not consumers.

The above point to continued revenue growth prospects ahead, but we also have to discuss the cost side of the business, including capex. While revenue for the quarter climbed 26% year over year to $64.6 billion, total expenses soared 68% year over year to $51.6 billion, including a $9.9 billion charge tied to the August 2026 settlement with a group of state attorneys generals. Focusing on continuing operations, the expense spending was tamer but still up more than 35% year over year, resulting in several hundred basis points of margin contraction compared to the year-ago quarter.

On the capex side of things, Meta narrowed its 2026 capex figure to $135 billion to $145 billion versus the previous $130 billion to $145 billion, it still implies a steep level of spending in the current quarter. Sandbox math tells us Meta plans on spending $55 billion to $65 billion in the current quarter compared to the $80 billion spent during the first nine months of 2026. As you let that sink in, remember the pronounced increase in capex spending at SpaceX (SPCX) we discussed earlier this week not only for the current quarter but for 2027 as well. The combination suggests robust chip and networking demand, but we’ll have more on that in a standalone alert before too long.

While Meta shied away from giving any formal 2027 capex guidance last night, given Mark Zuckerberg’s comment that Meta intends to build capacity to serve more than 1 billion Muse users over the next several years, odds are that capex spending will remain at elevated levels next year. Meta also expects to invest in its business in new AI models as well as efforts to drive greater cost efficiency with those models, and Muse.

As we see it there are two overhanging issues weighing on the shares on Thursday. First, Meta’s free cash flow for Q3 2026 was -$2.1 billion, and while that includes the $9.9 billion charge, the step up means the company’s free cash flow will remain constrained. Granted it ended the quarter with $82.4 billion in cash, but it also has $83.7 billion in debt. That brings us to the second issue: How is Meta going to continue to fund this buildout?

In the past, the times to own META shares has been when the company has either emerged from an investment phase or is winding one down leaving ensuing margin improvement to drive favorable EPS and cash flow comparisons. Odds are that will continue to be the case. In the past, those efforts were mainly geared around advertising and monetization. While those are still there, this time around, we have the company’s AI efforts. Yes, that is driving up spending, but further progress on the AI front, internally and with outside customers, both businesses and consumers alike, has the potential to drive revenue and bolster margins. It also has the potential to improve cash flow.

We would not be shocked to eventually learn that one of the reasons Meta management shared that 2027 budget and capex plans are “still being built” is to get a better understanding of how quickly it can monetize Muse and move down the Muse cost curve. Those learnings will not only influence how Meta discusses its total spending plans for 2027 in January, but the initial revenue, margin, earnings and cash flow comments it will share.

While we are inclined to focus on the longer-term, which means the benefit to come when Meta moves past this current investment phase, our near-term focus will be on developments with Muse and corresponding monetization data. That means, at least for now, we’ll maintain our $850 price target.

Fortunately, when we look at where the shares are on Thursday near $661, we took some very profitable META chips off the table a month ago when the shares were trading just below $750. We’ll keep an eye on the share relative to the 50-day moving average just below $663 and the conversion of the 100-day and 200-day ones near $630 to $632. We’ll also be mindful of the gap we see in the chart from early September.

More Pro Portfolio

At the time of publication, TheStreet Pro Portfolio was long META shares