A lesson from poker tells us not to fold on Meta after its earnings sell-off. Here’s why

Meta's strong quarterly results were overshadowed by artificial intelligence spending concerns on Thursday, sending shares down 7%. The sellers made a mistake — and a trip to the poker table helps illustrate their folly. The bulls and bears seem to have hands of equal rank. There's a pair of reasons to stay away (a potential equity raise looms and other negative headlines dampen sentiment), balanced out by a pair of reasons to buy the weakness (the core business is on fire and the stock is cheap). To break the tie, we can take a lesson from poker. When you first start to learn the game (Texas Hold 'em for me), the first thing you learn is which hands have a higher value — a pair, two pair, three of a kind, and so on. Once you've committed that to memory, the next concept to learn is that of the "kicker." The kicker is the card that breaks a tie. Let's say you have a pair of kings with a queen kicker, while your opponent has a pair of kings with an ace kicker. Your opponent wins because the kings cancel out while the ace trumps the queen. Understanding the importance of a kicker may be the key to figuring out what to do with Meta shares going forward. With Thursday's decline, the stock has now given up nearly all of its gains following the exciting launch of its Muse personal agent app on Sept. 8. Is Meta's kicker a deuce, or a trillion-dollar ace in the hole? META YTD mountain Meta's year-to-date stock performance. The bear case Let's start with two reasons to sell the stock and stay away in the coming months. 1. The newest reason arrived alongside Wednesday's earnings release: Meta plans to create new Class C non-voting shares that the company can use to fund its AI infrastructure plans. Each shareholder of Meta's voting Class A will get one Class C, which effectively splits the stock. If Meta were to do a secondary offering of Class C shares down the line, then existing shareholders will see their financial interest in the company watered down, giving them a smaller claim to future earnings. To be sure, nothing is confirmed about what Meta plans to do with this new Class C stock, but the prospect of investing in a company is less attractive when a dilution event may be just around the corner. And a securities filing Wednesday makes clear that such an event could be coming, and that the scale of the fund-raising in the coming years may be more than some investors initially thought. Meta's free cash flow entering negative territory in the third quarter adds to the concern. "The scale of investment required to compete, sustain our growth, expand our infrastructure, and pursue new strategic initiatives amidst the dramatic transformation taking place in the tech industry and global economy related to artificial intelligence is unprecedented," the filing said. Some quick math: Based on a $650 share price, the team has to sell about 15.4 million shares to raise $10 billion. Given there are about 2.7 billion shares outstanding (on a fully diluted basis), a 15.4 million share sale would result in about 0.567% dilution. This translates to more than 5% dilution if they were to raise $100 billion in an initial secondary sale. 2. A second reason to stay away is the headline risk. The latest example is that a New Mexico judge on Wednesday ordered the company to pay a $25 billion penalty relating to the Cambridge Analytica data privacy scandal. Though Meta intends to appeal the decision, it nonetheless serves as the latest reminder that social media is a hot-button political issue, with many looking to clamp down on some of the practices that helped the company grow to its current juggernaut status. In other words, they're looking to alter one of the most profitable business models in history. This new financial penalty comes less than two months after Meta settled with a coalition of state attorneys general to resolve a lawsuit focused on youth mental health issues and social media usage. Meta took a $9.89 billion legal settlement charge in its just-reported third quarter. Meta also faces headline risk tied to data centers, which have gotten a lot of pushback from community residents and politicians during this election cycle. With the midterm elections less than two weeks away, this has become a hot-button political issue. Whether that remains the case coming out of the elections remains to be seen. For now, it is very much an overhang on the entire AI trade. The bull case Now let's get into two main reasons to stick with Meta and consider buying the weakness. 1. The fundamentals are arguably as strong as ever. Muse is off to an incredible start, and in addition to opening up entirely new revenue streams, Meta's AI model investments are clearly strengthening the core Family of Apps business. "This quarter, we also began moving our content understanding models onto our first-party Muse model family," CFO Susan Li said on Wednesday's earnings call. "In offline evaluations, these models are outperforming our prior production models and are reducing per-unit content processing costs by more than 80% across Instagram, Threads, Facebook and ads. Beyond improving quality, owning more of this stack gives us greater flexibility to develop models around the signals that matter the most for personalization." The company's wildly profitable core advertising business gives Meta Superintelligence Labs (MSL) — the company's AI division formed in 2025 and led by Alexandr Wang — a structural advantage versus pure-play AI labs like Anthropic and OpenAI. In addition to the top-line strength being delivered from AI, Zuckerberg called out his expectation for a 10-fold increase in computing power efficiency to serve Muse in the next year, "which will enable it to be profitable once the revenue lines are at scale." Moreover, the team has found religion in the money-losing Reality Labs segment, which is home to its smart-glasses business and other virtual reality efforts. Zuckerberg said its operating loss should come down to around $15 billion next year and trend "towards profitability from there." We're encouraged that the Reality Labs strategy has shifted to reduce its drag on earnings growth. 2. Meta shares are trading at an undemanding valuation. Using a roughly $650 share price, the stock trades at roughly 19 times 2027 consensus earnings estimates. That compares to the S & P 500 trading at roughly 18.5 times earnings, which we can use as the proxy valuation for the "average" company in the index. We would argue Meta is far better than average and therefore deserves a premium valuation to the market. On that note, Wall Street expects Meta to keep growing earnings at a healthy clip in the years ahead. The implied compound annual growth rate (CAGR) for earnings between fiscal 2026 and fiscal 2031 is 17.1%, based on consensus FactSet estimates for each year. In other words, this is not a company with worsening prospects where a discounted multiple would be warranted. The upshot is that Meta's multiple is so low that it provides the hedge we need to counterbalance the potential equity raise next year. Say you pay the 19-times valuation now, and we're later confronted with a $100 billion equity raise early next year — creating more shares outstanding and lowering Meta's earnings per share (all else equal). That might mean you actually paid a little over 20 times earnings. Not ideal, but we would argue it is still highly attractive given the underlying business momentum on display Wednesday night. The kicker On their own, we would argue the positives around the core business and valuation serve to offset the negatives. That's us putting our finger on the scale. However, playing it straight, the kicker here really favors the bulls. The kicker, in our view, is that we've yet to see the true upside that can come out of Meta Superintelligence Labs. Consider this: Meta has a market cap of about $1.75 trillion. The leading frontier labs, Anthropic and OpenAI, are reportedly being valued in the ballpark of $1.5 trillion . To be sure, there is plenty of debate on whether the pure-play labs, which are believed to be losing tens of billions per year, are being properly valued. While that debate rages on, what is clear is Meta's own lab, which is now very much pumping out frontier-level models , isn't being valued anywhere near the levels of Anthropic and OpenAI. Meta shares are probably getting some credit for the benefits that MSL is bringing to the company internally — i.e., the benefits to engagement and monetization of Facebook, Instagram, and WhatsApp. But we would argue the stock is being awarded no value for the revenue streams that MSL itself may create for the entire company. For example, Meta is openly building an enterprise platform and hired the CEO of another public company , CJ Desai from MongoDB , to lead the effort. So, it's no secret that Meta has its eyes on the enterprise customers from which Anthropic currently derives nearly all of its revenue. The most bearish investors out there may argue that MSL is indeed worthless or worse, in that it's driving AI investments to unsustainable and unhealthy levels. However, we believe the hype is real, and that Muse is a clear example of the lab generating what will ultimately prove to be a new, multi-billion revenue stream. But, as is the case with most startups, the fixed costs need to be taken in advance of the revenue realization. So, is MSL worth nothing? We would strongly push back on that view. Whether it's worth $500 billion, $1.5 trillion, or something in between is a worthwhile debate to have. As it stands now, though, we think figuring out the exact right number is less material to the decision of what to do with the stock now. More important is that long-term investors understand that while the pros and cons of stepping into the stock now may counterbalance each other, the kicker — that there is a business hidden inside of Meta that could, conservatively, be worth hundreds of billions over time as the infrastructure comes online and the Muse business scales — is very much an ace in the hole. The kicker is in the hands of the bulls. Bottom line We didn't make a move Thursday, content with the stock's 3.6% weighting in our portfolio. But having sold shares much higher in September during the height of the Muse excitement, and remaining bullish on Meta for the long term, we are actively looking for an opportunity to upgrade the stock to our buy-equivalent 1 from its current 2 rating. For those without a position, current levels are attractive, as long as there's an understanding that while the bearish pair may result in further near-term downside, the bullish pair — coupled with the MSL kicker — means that decline will be worth buying into. In stocks, like in poker, you have to know when to hold them and know when to fold them. With Meta, we see no reason to fold them. (Jim Cramer's Charitable Trust is long META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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