Meta's Earnings Disappoint as AI Investments Erode Cash Flow, Stock Plunges 10% After Hours

Meta (META-US) saw its free cash flow eroded by massive investments in artificial intelligence (AI), while its revenue outlook for the current quarter fell short of market expectations, amplifying investor concerns that the social media giant may struggle to quickly profit from its AI investments. The company's stock plunged as much as 10% after hours on Wednesday (29th).

Key Financial Figures vs. Analyst Forecasts

Q3 Revenue: $61–64 billion vs. $63.2 billion

Full-Year Capital Expenditure: $130–145 billion, up from the previous range of $125–145 billion

Meta forecasts quarterly revenue between $61 billion and $64 billion, with a midpoint of $62.5 billion, below analyst expectations. The company noted this forecast "assumes foreign exchange will be a roughly 1% headwind to year-over-year revenue growth at current rates."

Regarding capital expenditure, Meta narrowed its full-year capex guidance to $130–145 billion, up from $125–145 billion. Earlier this year, the company raised its capex forecast to a maximum of $145 billion, which triggered market backlash.

Meta's stock dropped as much as 10% after hours on Wednesday and was still down 6.5% at the time of writing. As of Wednesday's closing, Meta is down 11% year-to-date, while the Nasdaq Composite has risen about 5% over the same period.

Minda Smiley, Senior Analyst at Emarketer, said: "Meta's strong revenue growth is once again overshadowed by its capital spending plans. Even if Meta didn't raise its spending forecast, investors would still demand more information, including potential compute business initiatives and how the company plans to monetize AI."

Total capital expenditure by major U.S. tech firms this year could reach as high as $725 billion, primarily for building AI infrastructure and data centers. Alphabet (GOOGL-US) last week raised its annual capex forecast to a maximum of $205 billion, causing its stock to fall—highlighting investor caution toward tech giants' AI spending and concerns over whether these investments will yield sufficient returns.

Q2 (ended June 30) Key Financials vs. Analyst Forecasts

Revenue: $60.8 billion vs. $60.17 billion

Adjusted EPS: $6.18 vs. $7.22

Daily Active Users (DAU): 3.6 billion vs. 3.61 billion

Meta's revenue surged 28% last quarter to $60.8 billion—the fastest growth since Q4 2021, excluding Q1 of this year.

Net income fell to $15.85 billion from $18.34 billion a year earlier. Its Reality Labs division posted an operating loss of $4.6 billion in Q2, with revenue of $431 million, compared to Wall Street's forecast of a $5.07 billion loss and $423.4 million in revenue.

Meta's free cash flow in Q2 plunged to $784 million, the lowest since Q3 2022 and far below $8.55 billion a year earlier. The company has recently announced several AI-related offerings, including a subscription-based consumer chatbot service and AI models available for developers to use for a fee.

Rival Alphabet last week reported that its free cash flow turned negative for the first time due to massive AI investments.

Unlike Alphabet and other hyperscale cloud providers such as Amazon (AMZN-US) and Microsoft (MSFT-US), Meta does not currently have a thriving cloud computing business.

However, this could change as Meta considers leasing idle computing capacity to third parties. CEO Zuckerberg said: "We're receiving a lot of offers for our compute resources at prices clearly above our cost to obtain them."

Meta's total costs and expenses last quarter were $42.03 billion, up 55% year-over-year. This includes $2.4 billion in legal-related expenses and $1.18 billion in severance costs from layoffs that began in May.

CFO Susan Li said during the earnings call that, excluding these expenses, operating income would have grown 9% year-over-year.