Meta’s Free Cash Flow Plunges 90% on AI Investments... Disappointing Outlook Sends Shares Down 10%

Despite 28% Revenue Growth in Q2, EPS Misses Expectations
AI Investments Cause Free Cash Flow to Plunge by 90%
Full-year Capital Expenditure Floor Raised by $5 Billion
Q3 Revenue Guidance Also Falls Short of Market Expectations

Meta, the US big tech company operating Facebook and Instagram, saw its stock price plunge nearly 10% in after-hours trading after reporting earnings per share (EPS) and third-quarter revenue outlook that fell short of market expectations. Investor sentiment was further dampened by a more than 90% drop in quarterly free cash flow compared to a year earlier, driven by a surge in artificial intelligence (AI) infrastructure investment.

Meta CI. Reuters Yonhap News

On July 29 (local time), Meta announced that its revenue for the second quarter of this year rose 28% year-on-year to $60.8 billion (approximately KRW 87.8 trillion). This surpassed Wall Street’s consensus estimate of $60.17 billion compiled by financial data firm London Stock Exchange Group (LSEG).

However, EPS fell well short of expectations, coming in at $6.18 compared to the market forecast of $7.22. Net income totaled $15.85 billion, a decrease of 14% from $18.34 billion in the same period last year.

Rising costs weighed on profitability. Meta’s total costs and expenses for the second quarter were $42.03 billion, up 55% year-on-year. This included $2.4 billion in legal-related costs and $1.18 billion in severance associated with layoffs initiated in May.

During the earnings conference call, Susan Li, Meta's Chief Financial Officer (CFO), explained that, excluding these one-off costs, operating profit would have increased 9% year-on-year.

The 'app family' division—which includes Facebook, Instagram, and other Meta platforms and accounts for most of Meta’s revenue—recorded sales of $60.37 billion, an increase of more than $13 billion from a year prior. However, rising cost pressures meant that the segment's operating profit actually fell by around $1.6 billion.

Meta’s total daily active people (DAP) across its apps reached 3.6 billion, up 3% year-on-year but just shy of the projection of 3.61 billion compiled by StreetAccount.

Reality Labs, which develops virtual reality and AI-based wearable devices, reported sales of $431 million, beating the market expectation of $423.4 million. However, it posted an operating loss of $4.6 billion—less than the anticipated $5.07 billion loss.

Q3 Revenue Outlook Also Misses Expectations ... Capital Expenditure Forecast Raised

Meta forecast third-quarter revenue in the range of $61 billion to $64 billion. The midpoint, $62.5 billion, is below the Wall Street consensus of $63.15 billion compiled by LSEG. Meta expects that, based on current exchange rates, foreign exchange fluctuations will reduce revenue growth by approximately 1 percentage point compared to the previous year.

Cash depletion from AI infrastructure investment has also raised market concerns. Meta's capital expenditures in the second quarter reached $31.08 billion. As a result, free cash flow plummeted more than 90% from $8.55 billion in the same period last year to $784 million.

Meta adjusted its annual capital expenditure outlook from the previous range of $125 billion–$145 billion to $130 billion–$145 billion. By raising the lower end by $5 billion while maintaining the upper limit, the company signaled its intention to maintain or expand AI infrastructure investments.

Mark Zuckerberg, Meta's Chief Executive Officer (CEO), said, "A significant portion of our computing resources will go toward AI model training, driving core business growth, launching personal agents, and introducing new products." He added, "We also expect to build a large business providing computing services to major clients."

Meta is considering not only developing its own AI models but also leasing unused computing capacity to external companies. Unlike Alphabet, Amazon, and Microsoft—which have established cloud businesses—Meta has a relatively weak foundation for directly monetizing its massive AI infrastructure investment. Analysts suggest that leasing computing resources could become a new revenue stream to offset the burden of AI investment.

Recently, Meta has also announced a series of large-scale data center investments. On July 28, it unveiled plans to construct a $14 billion data center in El Paso, Texas, in partnership with BlackRock. The Hyperion Data Center project in Louisiana is expected to cost over $50 billion, and Meta is also pushing ahead with a $9 billion data center in Alberta, Canada.

However, investors are focusing on when and to what extent these enormous expenditures will actually translate into profits. Competitor Alphabet also recently posted negative quarterly free cash flow for the first time since listing, due to expanded AI investments.

On this day, Meta's share price fell 1.31% during regular trading, and then plunged nearly 10% after the earnings announcement in after-hours trading. As of the regular session close, Meta shares were down 11% year-to-date, while the Nasdaq index had risen about 5% over the same period.

This content was produced with the assistance of AI translation services.