A Meta Platforms logo at a conference in Mumbai, India in September, 2023.Francis Mascarenhas/Reuters
Meta Platforms META-Q reported a precipitous 91-per-cent drop in second-quarter free cash flow on Wednesday, underscoring the financial strain of the social media giant’s costly AI build out despite an uncertain payoff.
The Facebook parent company reported free cash flow of US$784-million in the second quarter ended June 30, down from US$8.55-billion reported a year earlier, sending its shares down 10 per cent in extended trading.
Meta’s cash flow wipeout echoed Alphabet’s, which last week said it was cash flow negative for the first time ever as it spent US$5.9-billion in the second quarter. The rate of spending stunned even the most bullish of Wall Street investors, driving Alphabet’s stock down.
Meta’s revenue jumped 28 per cent to US$60.8-billion in the quarter, the quickest pace of growth since the fourth quarter of 2021, barring the first quarter of 2026.
“We expect that a significant portion of our compute is going to go towards training our models, growing our core business and delivering personal agents and new products, but we also expect to grow a large business serving large customers as well,” CEO Mark Zuckerberg said on an earnings call.
Meta currently has 32 data centres across the globe in operation or under construction, with 28 of them in the U.S. The company also raised the lower end of its capital expenditure outlook.
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It now expects 2026 capital expenditure to be between US$130-billion and US$145-billion, compared with its prior forecast of US$125-billion to US$145-billion. At the beginning of the year it had forecast capex between US$115-billion and US$135-billion.
The feverish spending by Big Tech is expected to reach well above US$700-billion this year, primarily on AI, while Morgan Stanley has pegged the estimated spend at more than US$1-trillion for the next year.
“Meta’s report echoes what we saw from Alphabet and Tesla last week: strong revenue growth, but even faster growth in spending. The market is repricing a deteriorating free cash flow outlook, and in an environment of higher capital costs, that does not sit well,” said Thomas Monteiro, senior analyst at Investing.com.
Luke Stillman, a managing director at research firm Madison and Wall, said: “Meta’s underlying ad business that’s financing everything though is still performing well and is our main focus.”
While investors are scrutinizing Meta’s AI spending, it faces legal risks related to its core business. The company said in a court filing this month that four states were seeking US$1.4-trillion in penalties over accusations it designed its Facebook and Instagram platforms to addict young users and misled the public about their safety.
Meta had warned in April that legal and regulatory blowback in the European Union and the U.S. over youth social media issues “could significantly impact” its business and financial results.
The company said on Wednesday that it continued to see this scrutiny. On the call, Meta CFO Susan Li said second-quarter operating income would have increased 9 per cent year over year without the company’s legal charges and severance expenses. Operating income actually fell 8 per cent.
“We continue to see scrutiny on youth-related issues in several markets and have a number of youth-related trials scheduled for this year in the U.S., which may ultimately result in a material loss,” she said in the company’s earnings statement.