Meta Platforms Inc.’s shares are trading at historically low valuation multiples, raising questions about the company’s future prospects despite solid revenue growth. The stock currently trades near its lowest price-to-earnings ratio in three years, around 18 times forward earnings, significantly below valuations of other major technology companies such as Alphabet, whose premium over Meta has reached its highest level since 2022.

The tech giant reported a 33% increase in revenue for the first quarter, an impressive gain for a company of its size. Meta has leveraged artificial intelligence (AI) effectively to enhance its advertising business, which generates nearly all of its revenue. The company uses AI-driven algorithms to show users tailored posts and videos that increase engagement, leading to higher ad click-through and conversion rates. Meta noted a 6% rise in conversions resulting from ad clicks in the first quarter, alongside increased ad pricing, contributing to strong momentum in a sector under intense pressure to justify AI-related expenditures.

However, challenges loom for Meta’s growth trajectory, particularly in user expansion. The company’s combined platforms—which include Facebook, Instagram, WhatsApp, and Messenger—reported over 3.5 billion daily active users in the first quarter, with user growth of only 4% year over year. Notably, the number of daily active users declined sequentially for the first time since reporting began in 2019, casting doubt on sustained engagement gains.

Meta’s executives maintain confidence that their AI-integrated advertising strategy will continue to drive revenue growth. Yet analysts warn that without meaningful increases in user numbers, the effectiveness of AI enhancements in ad targeting could plateau. Unlike peers such as Amazon, Microsoft, or Google, Meta lacks diversified revenue streams like cloud computing or e-commerce operations, making it more reliant on advertising revenues.

While Meta has ventured into hardware, including AI-enhanced smartglasses and virtual reality devices, these efforts have yet to produce significant revenue or replace core products like smartphones. Other initiatives, such as video-calling devices and virtual reality headsets, have seen limited success.

Meta’s heavy investment in AI development has come with notable costs. The company recently introduced the Muse Spark AI model to better compete with rivals like Google, Anthropic, and OpenAI, following multiple strategic shifts. This has coincided with a sharp increase in capital expenditures—Meta announced a $10 billion increase in planned spending this year to approximately $135 billion.

To fund this, Meta has significantly increased its debt load, holding over $57 billion in long-term debt as of the end of the first quarter, a substantial rise from around $10 billion in late 2022. This figure excludes a recent $25 billion bond issuance and off-balance-sheet financing for a $27 billion data center in Louisiana.

Analysts warn that Meta’s spending growth may be unsustainable, with cash costs outpacing forecast revenues. Some caution that the company “spends more than it can afford,” given its current financial trajectory.

Compounding these financial concerns are legal and regulatory challenges. Measures such as Australia’s ban on social media use by individuals under 16 could impede user growth, while ongoing litigation in the U.S. related to social-media addiction and harm to children may result in further legal obstacles.

While Meta’s stock price may appear attractive on valuation metrics, investors remain wary amid uncertainty about the company’s ability to sustain growth, manage rising costs, and overcome regulatory risks.