Meta Shares Plunge 10% Amidst Aggressive AI Spending

Meta Platforms saw its shares drop by 10% in extended trading Wednesday after reporting a 91% decrease in second-quarter free cash flow, a significant financial strain attributed to the company's substantial investments in artificial intelligence.

The company reported free cash flow of $784 million for the quarter ending June 30, a sharp decline from the $8.55 billion recorded in the same period last year. This financial performance mirrors that of Alphabet, which recently reported its first-ever cash flow negative quarter due to its own AI spending.

Despite the cash flow concerns, Meta's revenue increased by 28% year-over-year, reaching $60.8 billion, marking its fastest growth pace since late 2021. CEO Mark Zuckerberg indicated on an earnings call that a significant portion of the company's compute resources will be dedicated to training AI models, expanding its core business, and developing personal agents and new products. He also noted plans to build a substantial business serving large enterprise clients.

Meta is currently operating or constructing 32 data centers globally, with 28 of these located within the United States. The company also revised its capital expenditure outlook, now expecting 2026 capital expenditures to range between $130 billion and $145 billion, an increase from its previous forecast of $125 billion to $145 billion and the $115 billion to $135 billion projected at the start of the year.

This surge in spending by major technology companies on AI is substantial. Industry estimates suggest Big Tech's AI-related expenditures could exceed $700 billion this year, with projections from Morgan Stanley indicating over $1 trillion in spending for the following year. Analysts note that while revenue growth remains strong, the faster increase in spending, particularly on AI, is causing investors to re-evaluate free cash flow outlooks in a higher capital cost environment.

While investors focus on Meta's AI investments, the company also faces legal challenges. In a recent court filing, four states accused Meta of designing its Facebook and Instagram platforms to be addictive for young users and misleading the public about their safety, seeking $1.4 trillion in penalties. Meta had previously warned that regulatory scrutiny in the U.S. and European Union regarding youth social media issues could significantly impact its business and financial results. The company confirmed this scrutiny continues, with several youth-related trials scheduled in the U.S. this year, potentially leading to material losses.

Meta's Chief Financial Officer Susan Li stated that second-quarter operating income would have grown by 9% year-over-year if not for legal charges and severance expenses. Without these factors, operating income actually declined by 8%.