Meta's $130B AI bet faces rising costs and investor pushback

Meta Platforms Inc. spent $31 billion on capital projects in the second quarter alone, yet free cash flow collapsed 91% to $784 million, the starkest sign yet that its artificial intelligence build-out is consuming cash faster than the advertising business can replenish it.

"AI is accelerating our core business today," Chief Executive Officer Mark Zuckerberg said on the earnings call, pointing to new products and enterprise opportunities. But the numbers tell a different story: earnings of $6.18 a share missed the $7.22 consensus, and operating margin shrank to 31% from 43% a year earlier.

Revenue rose 28% to $60.8 billion, beating forecasts, as AI-tuned recommendations lifted engagement and ad prices climbed 12%. Yet profit fell 14% to $15.8 billion, dragged down by $2.4 billion in legal charges and $1.18 billion in severance from the May layoff of about 8,000 staff. Meta narrowed its full-year capital expenditure forecast upward to between $130 billion and $145 billion, roughly double the $72 billion it spent last year.

The spending gap puts Meta in a bind its Big Tech peers do not face. Microsoft Corp. and Alphabet Inc. can point to cloud businesses that rent AI capacity back out, turning infrastructure into revenue. Meta has no such business — its spending funds its own apps and models, leaving investors to absorb the cost without an obvious new revenue line. Alphabet reported its first-ever negative free cash flow last week; Meta's $784 million is barely positive.

A Cloud Business in All but Name

Zuckerberg sketched a second act on the call: renting out excess AI compute to large enterprise customers, a cloud-style line that would turn Meta's vast infrastructure into a revenue stream rather than only a cost. The company also set up a $14 billion data-center venture with BlackRock Inc. that will own 80% of the campus, moving some financing off the balance sheet.

But the pivot comes late relative to rivals. Meta is spending like a cloud provider without being one yet, funding a superintelligence ambition out of an advertising engine. Reality Labs, its headset and glasses unit, lost another $4.6 billion in the quarter, pushing its cumulative operating losses past $80 billion since it began reporting the segment.

Legal Clouds and Borrowing Constraints

A group of US states is seeking as much as $1.4 trillion in penalties over claims that Meta's products are designed to addict young users, litigation that Meta's finance chief warned "may ultimately result in a material loss." The company booked a $2.4 billion charge in the quarter tied to legal proceedings, and more trials are expected this year.

The borrowing environment is also tightening. With free cash flow evaporating and capex doubling, Meta's ability to fund the build-out through internal cash generation is narrowing. The company's shares fell about 5% in after-hours trading following the report and tumbled as much as 10% the next day as the scale of the cash drain sank in, according to market data.

The Investor Calculus

Meta's bet is that the same data centers will eventually pay their own way through enterprise AI services. But the timeline remains uncertain. Microsoft's AI spending showed up as cloud revenue on the same day Meta reported; Meta's showed up as a hole in its cash flow. For investors, the question is how many quarters the company can spend at this pace before the payoff has to arrive. Meta trades at roughly 22 times forward earnings, a discount to Microsoft's 30 times and Alphabet's 24 times, reflecting the market's skepticism that the build-out will translate into profits anytime soon. Morgan Stanley analysts maintained their overweight rating but noted that "the path to monetization remains less visible than for peers."

This article is for informational purposes only and does not constitute investment advice.