Meta Platforms Inc., once seen as one of the strongest performers among Big Tech at the start of the year, is now facing mounting pressure. Investor concerns around legal challenges and rising spending on artificial intelligence have triggered a sharp sell-off, with the company’s stock witnessing a significant decline in recent weeks.

Sharp decline in stock performance

Shares of the parent company of Facebook and Instagram have dropped 19 percent this month alone. This puts the stock on track for its worst monthly performance since October 2022, when a weak revenue forecast and heavy investment in the metaverse had unsettled investors.

Last week, the stock suffered an 11 percent fall, reflecting growing unease in the market. During March, Meta has lost nearly $310 billion in market value, highlighting the scale of the downturn.

Shift from Metaverse to AI raises new concerns

Earlier, Chief Executive Officer Mark Zuckerberg had urged investors to remain patient as the company increased spending on the metaverse. Now, the focus has shifted towards artificial intelligence. However, worries about excessive spending have not eased and appear to be intensifying.

Despite strong revenue growth projections of around 25 percent this year, up from 22 per cent last year, investors are concerned about declining free cash flow. Estimates suggest free cash flow could fall by 83 percent to below $8 billion, compared to $46 billion in 2025.

At the same time, capital expenditure is expected to rise sharply by 77 percent to $123.5 billion this year and could exceed $140 billion by 2027. The company has also cut several hundred jobs as it continues to invest heavily in AI.

Legal challenges add to investor anxiety

Legal risks have added another layer of uncertainty. A jury in New Mexico recently ruled that Meta misled teenagers about the safety of its platforms. In a separate case related to social media addiction, both Meta and Alphabet Inc. were found liable.

These developments have raised broader concerns about the long-term future of social media companies. Some analysts have drawn comparisons with the regulatory pressures faced by the tobacco industry in the past.

Analysts debate ‘Big Tobacco’ comparison

Market experts are divided on whether the situation could evolve into a crisis similar to that faced by tobacco firms. Tim Ghriskey of Ingalls & Snyder said that while the comparison may seem unlikely, unexpected developments cannot be ruled out.

He pointed out that eliminating the negative impact of social media entirely would require drastic measures, which could severely affect the company’s business model.

Mark Mahaney of Evercore ISI also noted that investors have been questioning whether this could become Meta’s “Big Tobacco moment”. However, he believes such a scenario remains unlikely at this stage.

Stock underperforms despite earlier gains

The recent decline marks a sharp reversal from earlier in the year. In January, Meta shares had risen 8.5 percent and were among the top performers on the Nasdaq 100 Index.

At that time, strong sales forecasts suggested that the company’s investments in AI were beginning to pay off. However, the latest developments have caused the stock to fall 33 percent from its all-time high, significantly underperforming the broader tech index.

Ongoing cases could prolong uncertainty

Legal challenges are expected to continue, with several social media-related cases scheduled for trial in California later this year. Analysts believe these issues could remain a drag on Meta’s stock for some time.

According to TD Cowen analyst Paul Gallant, the rulings could force companies like Meta and Google to redesign their platforms for younger users and consider financial settlements with plaintiffs, unless higher courts intervene.

Meta faces greater risk than alphabet

Compared to Alphabet, Meta is seen as more exposed to these risks. While Alphabet’s involvement is mainly through YouTube, Meta generates the majority of its revenue from advertising through its family of apps.

Strong analyst support despite concerns

Despite the challenges, most analysts remain optimistic about Meta’s long-term prospects. Of the 80 analysts tracked by Bloomberg, 72 have given the stock a buy rating, while only one has recommended selling.

Based on average price targets, the stock could rise by 64 percent over the next year, marking the strongest expected return since 2022.

Valuation drops, making stock more attractive

Interestingly, analysts have become more positive about Meta’s future earnings. Estimates for 2027 profits have increased by 2.4 percent over the past three months, while revenue forecasts have risen by 6.4 percent.

The falling share price combined with improved projections has made Meta the most attractively valued among the so-called Magnificent Seven tech stocks. It is currently trading at around 16 times expected earnings over the next year, its lowest level since March 2023.

Mixed views on future outlook

Some investors believe the lower valuation offsets the current risks. Phil DeAngelo of Focused Wealth Management noted that penalties so far have been relatively limited and that Meta has the ability to adjust its platforms to address concerns.

He added that the company’s strong revenue growth indicates its ability to generate returns from its heavy investments, even as spending levels remain high.