Meta Platforms (META) generated the kind of sales growth most firms would be thrilled to see.
Wall Street retaliated by cutting about 9% off the stock early Thursday, July 30.
Facebook’s and Instagram’s parent company earned $60.8 billion in sales in the second quarter, up 28% from a year ago. Advertising income jumped 27% to $59.36 billion, everyday users rose, and the average amount Meta charged advertisers rose substantially.
Then investors turned to the cash-flow statement.
Meta earned $31.86 billion in operational cash flow. Capital expenditures totaled $31.08 billion, leaving free cash flow of a mere $784 million. That was a staggering 91% drop from $8.55 billion a year ago.
Costs and expenses jumped 55% to $42.03 billion. Operating margin dropped to 31% from 43%, operating income was down 8%, and net income plummeted 14% to $15.85 billion.
Not all the deterioration was down to artificial intelligence. Meta took a $2.4 billion litigation charge and $1.18 billion in severance costs.
But the message from the sell-off was brutal: Wall Street thinks CEO Mark Zuckerberg’s AI ambitions are burning cash faster than Meta can prove it will generate any.
“AI is accelerating our core business today, powering our next generation of products, and opening the door to entirely new enterprise opportunities,” Zuckerberg said.
Meta’s ad machine is funding a historic cash bonfire
Meta’s advertising business is still scary powerful.
Advertising revenues grew to $59.36 billion from $46.56 billion a year earlier. Ad impressions across Meta’s family of applications rose 14%, while the average revenue per ad grew 12%. Those gains imply Meta is attracting more advertising activity and getting more dollars for it.
Its audience isn’t going away, either. An average of 3.6 billion individuals used at least one Meta application every day in June, up 3% from a year ago. Zuckerberg said Instagram also hit 2 billion daily users, and Threads topped 500 million monthly users.
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The problem isn’t the cash flow from operations. That actually rose around 25% to $31.86 billion.
The problem is that most of it was eaten up by capital spending. In the three months, Meta spent $31.08 billion on property and equipment, primarily as it scrambled to get chips, servers, networking equipment, power, and data center capacity for its AI systems.
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Research and development expenditure adds to the pressure. That expense jumped to $21.66 billion from $12.94 billion, by far Meta’s greatest operational expense.
The company also boosted the bottom end of its 2026 capital expenditure forecast to $130 billion from $125 billion, while keeping the top at $145 billion. Meta had guided spending at between $115 billion and $135 billion for the year.
Bloomberg / Getty Images
Zuckerberg now faces a brutal prove-it quarter
Meta’s outlook offered little reason for investors to expect the spending pressure will ease anytime soon.
The company anticipates third-quarter revenue of $61 billion to $64 billion. The midpoint of $62.5 billion was shy of the $63.14 billion economists had projected, according to FactSet projections quoted by the Associated Press. Meta also raised its full-year expense guidance to a range of $165 billion to $169 billion.
It makes for a brutal setup.
Meta has to grow its advertising revenue fast enough to pay for an infrastructure push that could cost as much as $145 billion this year. It has to accomplish that while defending margins, negotiating legal concerns, and trying to build wholly new AI businesses before investors decide the anticipated payback is too distant.
This company has a lot of resources. Meta had $90.26 billion in cash, cash equivalents, and marketable securities as of the end of June, but also had $83.66 billion in long-term debt. Its advertising business still generates tens of billions of dollars in quarterly operating cash flow.
The business is not necessarily cash-poor at this moment.
It faces a more threatening challenge for a premium technology stock: a credibility deficit.
Key takeaways for Meta investors
- Free cash flow collapsed 91% to $784 million.
- Capital expenditures reached $31.08 billion in one quarter.
- Revenue surged 28% to $60.8 billion.
- Operating margin fell 12 percentage points to 31%.
- Net income declined 14% despite booming advertising sales.
- Meta could spend as much as $145 billion on capital expenditures this year.
- Third-quarter guidance failed to silence concerns about the payoff from AI.
The bullish take here is that Meta is giving up cash flow today to get the computational power necessary for the next big technology platform. When personal AI agents and enterprise solutions start generating income, it has a strong edge in its huge audience, sophisticated advertising system, and money.
The bearish interpretation is a much more explosive one.
Meta’s ad engine grew at an extraordinary clip, yet profitability declined, and almost no free cash rolled in. The company is spending at a cloud-provider scale without yet having a cloud-provider revenue stream, and Zuckerberg expects shareholders to trust that businesses supporting the expenditure will eventually arise.
Meta doesn’t have to prove that artificial intelligence is valuable.
It needs to show that Meta can get more value from the technology than the tremendous amount of cash it is throwing into it.
Zuckerberg constructed one of the most profitable ad factories in history.
And now he’s pouring almost all of Wall Street’s excess capital into an AI empire that isn’t yet completely realized.
Related: Is Meta Platforms a good long-term investment?
