By Adam Levine

Shares of Meta Platforms tumbled 11% on Thursday following the company's latest earnings release, and the slump continued into the end of the week. It wasn't because of sales, which were up a healthy 26% in the third quarter, but rather the mounting expenses from Meta's substantial AI investments. The company's forecast for 2025 capital expenditure investments were revised higher for a third time this year, and CEO Mark Zuckerberg said that the spending would continue into next year.

"It's pretty early, but I think we're seeing the returns in the core business," Zuckerberg said on Meta's earnings call. "That's giving us a lot of confidence that we should be investing a lot more, and we want to make sure that we're not underinvesting."

Investors, who have been patient around Zuckerberg's big AI initiatives, have suddenly changed their tune. Total costs were up 25% in the quarter, outpacing revenue growth. Its operating margin was down 2.7 percentage points from last year.

Zuckerberg remains a bold CEO who thinks the spending is necessary to keep Meta on top in a rapidly shifting landscape, but investors are growing weary of the hit to income.

There is a lag between capex and the related depreciation expenses. Wall Street analysts expect Meta's depreciation expenses to rise by 48% next year, 43% the year after, and continue its swift rise from there. In the process, depreciation will go from 9% of Meta's revenue this year to 22% in 2030.

It is becoming a much more asset-heavy company, which will reshape its financials for years to come.

There are two primary sources of expense growth. The first is the recent hiring blitz of AI researchers and their reported nine-figure salaries. This got accounted for under third-quarter research and development expenses, up 35% in the year. Share-based compensation for R&D rose 18% in just three months

The other source of expense growth is depreciation of property, plant, and equipment. Meta's capex binge is now projected to reach $70 billion to $72 billion this year.

Because capex typically fluctuates a lot year to year, it's given separate accounting to smooth out the lumps. It isn't expensed directly. Instead companies depreciate these large costs over time, which is what gets counted in the income statement. The largest spend is on the equipment that fills data centers, which gets expensed over 5 1/2 years in Meta's case. Every $100 billion Meta spends on equipment translates into $18 billion a year in depreciation expense.

Meta, which continues to run an impressive advertising business, has become a show-me story. It could be a bumpy ride for shareholders.

Apple earnings told a different story this past week. For the most part, the iPhone maker hasn't joined the AI spending race, so its financials -- and margins -- have remained largely intact. Apple's cash-return program -- buybacks plus dividends -- continues on pace and will soon hit a trillion dollars.

With its cash holdings over $120 billion, Apple began paying a dividend in 2012 and added a share buyback program the following year.

Since then, it has paid out a total of $994 billion, with over half of it coming in the last five years. In the process, Apple has reduced the diluted share count by 44%, providing a 78% boost to per-share metrics.

Even as its Big Tech brethren collect AI equipment, Apple is sticking to its rather asset-light ways. Since Tim Cook became chief operating officer in 2005, Apple hasn't operated its own factories, pushing those capital costs onto their contract manufacturers.

Apple could also try to match the massive capital budgets we see at Meta and the other big spenders, but it isn't the company's style. Time will tell if it's the right decision. Intel continued its cash return program even as Taiwan Semiconductor Manufacturing passed it by. Intel executives would surely like some of that cash back right about now.

While Google-parent Alphabet is exceeding Meta in AI capex, raising its 2025 guidance to a range of $91 billion to $93 billion, it has more to fall back on, with accelerating cash flows and over $100 billion in the bank. Despite the AI spending spree, Alphabet's free cash flow over the last 12 months is up 32% from the previous year. For Meta, it's down 14%.

One of Google's advantages over Meta is its cloud unit, which rents out these AI data centers over the internet. That segment had a strong third quarter with a much-improved profit margin. Meta's AI data centers, meanwhile, are just for its own use, meaning all of its AI spending has no immediate revenue to support it.

The cloud segment Meta lacks is a strength for Microsoft and Amazon.com. It's the one place all of the AI spending is generating any kind of current return. First-quarter revenue at Microsoft's Azure cloud was up 40% on the year. Operating profit margin in the Intelligent Cloud segment, which contains Azure, was 44%, though that has declined over the past two years. Azure provides sales and profit, even as depreciation begins to mount.

Amazon Web Services invented the modern cloud and it is still the largest provider, with $93 billion in sales in the first nine months of 2025. In the third quarter, AWS sales rose 20% from 2024, but that was outpaced by depreciation-driven expenses, dropping the operating margin by 3.4 percentage points from last year. Still, AWS provides profits that can help fuel the capital spending going forward.

For both companies -- and their stocks -- the cloud should provide crucial cushioning in the coming year. Think of it as their AI rainmaker.

Write to Adam Levine at adam.levine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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October 31, 2025 16:02 ET (20:02 GMT)

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