Meta Platforms Inc. began the year appearing as a leading performer among Big Tech stocks. However, investor anxieties regarding legal risks and heavy investment in artificial intelligence are now surfacing.

Stock Performance and Concerns

Shares of the Facebook and Instagram parent company were down 19% in March, marking their worst performance since October 2022. That previous decline was triggered by a disappointing revenue outlook and CEO Mark Zuckerberg’s request for investor patience regarding the company’s increasing spending on the metaverse.

Shift to AI and Rising Risks

While Meta is now de-emphasizing the metaverse in favor of AI, concerns about escalating spending have intensified. Furthermore, the company faces growing existential risks following recent legal rulings. A New Mexico jury found Meta misled teenagers about the safety of its social networks, and both Meta and Alphabet Inc. were held liable in a Los Angeles trial related to social media addiction.

Market Capitalization Loss

The stock has lost $310 billion in market capitalization throughout March. Wall Street is now considering the possibility that social media companies could face similar challenges to the tobacco industry following stricter smoking regulations, though many believe it is premature to draw such comparisons.

Analyst Perspectives

“I don’t necessarily see this as the same as tobacco, but stranger things have happened,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, which manages approximately $11 billion in assets and holds Meta shares. Ghriskey, who previously covered the tobacco industry, emphasized the importance of assessing litigation risks.

Mark Mahaney, an analyst at Evercore ISI, noted that the “persistent question we have gotten from investors” is whether this is “Meta’s Big Tobacco moment.” He added, “Is Meta uninvestible today? It’s possible, but we think unlikely.”

Financial Impact of AI Spending

Despite revenue growth projections of around 25% this year, up from 22% last year, investors are becoming wary of Meta’s substantial AI expenditures. Free cash flow is expected to decrease by 83% this year, falling to less than $8 billion from $46 billion in 2025.

Capital expenditure is projected to increase by 77% to $123.5 billion this year and exceed $140 billion in 2027. The company is also reducing its workforce amid this increased spending.

Legal Outlook and Analyst Ratings

With additional social media cases scheduled for trial in California state court this year, legal issues are expected to continue impacting Meta’s stock performance. TD Cowen analyst Paul Gallant suggested that unless the Supreme Court intervenes, Meta and Alphabet may need to redesign their services for teens and consider financial settlements.

Despite these challenges, Wall Street remains largely bullish on Meta. Of the 80 analysts tracked by Bloomberg, 72 rate the stock as a buy, with only one sell rating. Analysts predict a 64% increase in the share price over the next 12 months, representing the strongest implied return since 2022.

Valuation and Future Prospects

Consensus estimates for Meta’s 2027 earnings have increased by 2.4% over the past three months, with revenue projections up 6.4% during the same period. This combination of upward revisions and a declining share price has made Meta the cheapest stock within the Magnificent Seven. Its shares currently trade at around 16 times estimated earnings, the lowest valuation since March 2023.

Phil DeAngelo, managing director at Focused Wealth Management, believes the relatively low price outweighs the current issues. He stated, “So far the penalties have been small, and it can adopt new parameters to diminish the issues behind the suits, so I don’t see this as a tobacco-like overhang. At the same time, Meta has gotten extremely attractive, and the acceleration in revenue shows that even though the level of spending is huge, it knows how to monetize the investments.”