Is Meta’s (META) Stock Still Cheap After Its AI-Fueled Rally?

Meta Platforms, Inc. (NASDAQ:META) has galloped over the last few weeks, jumping almost 40% since the end of July.  Meta has risen by more than 20% since the September 8 launch of its Muse AI assistant alone. The rally has pushed the company’s valuation close to the $2 trillion mark, raising an important question: Is Meta’s stock still cheap after the AI-fueled rally?

At 21.8x forward earnings, Meta may still appear relatively cheap, prima facie. The consensus on the street is for Meta’s revenue to rise over 26% this year and another 20% in 2027, to $306 billion. Meanwhile, GAAP EPS is expected to rise from $23.5 in 2025 to $31.2 in 2026.

However, the top line does not account for Meta’s extraordinary AI spending. The company expects capex of $130 billion to $145 billion in 2026, while its second-quarter operating margin fell to 31% from 43% a year earlier.

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Bull Case

Meta’s AI expenditure appears to be having a positive effect on its already strong advertising business. In the second quarter, ad impressions increased 14% year over year while the average price per ad increased 12%. Those are great numbers for a maturing business. Meta attributed the increase in ad pricing partly to improvements in ad targeting and measurement tools.

However, Meta does not necessarily need a massive new AI revenue stream to justify its investment. That said, AI is already helping improve the economics of its existing business. CEO Mark Zuckerberg said the company’s AI investments are improving the experience for users. It is also driving better performance for advertisers.

Meta’s biggest advantage in consumer AI may be the sheer scale of its existing platforms. Zuckerberg said that 3.6 billion people use at least one of Meta’s social media apps each day, giving the company an enormous audience through which it can distribute and monetize the new AI products. AI-powered recommendations are expected to make Meta’s platforms more relevant and engaging, which, in turn, could increase the time users spend on Meta’s apps.

As mentioned earlier, the social media giant also has another potential growth engine in Muse. The AI assistant has already recorded 2.8 million downloads in its first 12 days, according to Apptopia data cited by Reuters. Jefferies estimates that Muse could generate $10.8 billion in annualized revenue by 2027 in an optimistic adoption scenario. So even if margins remain subdued in the short run, the additional Muse revenue could offset that by a bit.

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Bear Case

Obviously, the biggest concern is that Meta is spending heavily on AI before anyone knows exactly how those investments will translate into returns. The company is building enormous computing infrastructure and developing its own AI models, while also investing in products such as AI glasses and personal agents. Some of these investments are long-term in nature, Meta admits.

Competition is another concern. Meta is competing not only with other social-media platforms but, more importantly, also with companies building consumer AI assistants, including Google, Claude, and OpenAI. While the early traction of Muse is encouraging, users still have many alternatives, and Meta will need to turn adoption into a durable business. The returns are likely to take a while to kick off, if at all, and the intense competition puts additional question marks on AI earnings visibility.

Meta is trading at a relatively reasonable valuation of 23.7x forward GAAP earnings. However,  the question is no longer simply whether Meta can grow its core advertising business. Right now, the market is assigning increasingly more value to the company’s AI ambitions. If Meta is unable to monetize its AI products well enough, the market could become less forgiving.

Conclusion

Meta’s valuation remains supported by strong advertising growth, AI-driven improvements, and the potential for new AI revenue streams. However, its enormous AI spending is already weighing on margins and cash flow, while there is no visibility as to when the AI bet will start paying back. Whether the stock remains elevated and even continues to rise depends on how effectively and quickly the company converts AI investment into profits.

Market Sentiment

As of Q2 2026, 254 hedge funds in the Insider Monkey database held Meta Platforms, down from 262 in Q1. However, the total value of their holdings increased to approximately $43.75 billion, from about $41.7 billion in the previous quarter. Meta was also the fifth-most popular stock among hedge funds in the dataset.

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This article is originally published at Insider Monkey.