Meta Plunges Nearly 8% After Earnings; Why Wall Street Isn't Buying In

According to MarketWatch, Meta Platforms (META-US) shares plunged 7.9% on Thursday (30th) as investors voiced concerns over the company's massive AI investment spending and uncertainty about next year's investment outlook.

Evercore ISI analyst Mark Mahaney pointed out that one reason for the pressure on Meta's stock price is the company's "lack of forward-looking transparency" regarding its 2027 spending scale.

In its second-quarter earnings report, Meta once again raised its capital expenditure forecast for 2026, now expecting it to range between $130 billion and $145 billion, up from the previous lower-end estimate of $125 billion.

Meta CFO Susan Li stated that the company will continue to face "demand constraints" in the foreseeable future, including in its core business. "We want to invest in more compute capacity in many areas where return on investment remains positive, as long as we have sufficient compute available," she said.

Mahaney noted that investors were also disappointed that Meta did not provide specific details on the progress of its advanced AI models. Meta CEO Mark Zuckerberg only said the company is "continuing to scale up larger, more advanced models," which Mahaney described as "qualitative descriptions" lacking concrete information.

Additionally, Mahaney suggested that Meta's strategy of prioritizing the sale of its AI services over selling computing power may not have resonated with investors. Prior to the earnings release, investors had been encouraged by reports suggesting Meta might launch an external cloud business similar to those offered by Microsoft (MSFT-US), Alphabet (GOOGL-US), and Amazon (AMZN-US).

However, Zuckerberg stated during the earnings call that although Meta is currently receiving strong demand from customers willing to pay above-cost prices for compute capacity, the company still believes that selling its own AI services offers higher profitability than selling compute resources. He added that the company might still offer compute services to large enterprise clients in the future.

Mahaney argued that Meta's decision to maintain its current strategy means it is delaying an opportunity to boost revenue and free cash flow in the short term and offset part of its capital expenditures.

Meta's free cash flow for the second quarter was only $784 million, far below the $8.55 billion recorded in the same period last year.

Mahaney also said investors want to see Meta's monetization capability in non-advertising businesses validated. Meta's AI assistant, Meta Business Agents, launched in Q2, already has over 1 million monthly business users. However, it is still too early to determine how this product will drive revenue. The consumer-facing Personal Agents remains in development.

He concluded, "Meta's core business remains strong, but as AI investments continue to grow, the market wants to see monetization results beyond the core business... and so far, we haven't seen them."

MoffettNathanson analyst Michael Nathanson pointed out that Meta's operating margin continues to shrink, with no signs of stabilization. He attributed this primarily to rising depreciation expenses and costs from the establishment of Meta Superintelligence Labs last year.

Meta's operating margin for Q2 was 31%, down 10 percentage points from 43% in the same period last year. The company said the sharp increase in expenses this quarter was mainly due to legal litigation and severance costs. Excluding these one-time expenses, operating profit would have grown 9% year-on-year.

Nathanson acknowledged that Meta's use of AI to enhance its core apps and advertising products has delivered undeniable benefits. However, he emphasized that the market is more focused on whether Meta can maintain strong returns on invested capital as it shifts from a "light-asset" to a "heavy-asset" model.