Meta Platforms (NASDAQ: META) saw its stock rise 2.5% in Wednesday's regular trading session, even as the company grapples with a significant increase in costs that is pressuring its artificial intelligence (AI) recovery. The stock closed at $592.85, outperforming the S&P 500 by 2.01 percentage points. In premarket trading on Thursday, shares were up another 1.03% to $598.98, approaching the key $600 level.
The company's second-quarter results revealed a mixed picture. Revenue surged 28% year-over-year to $60.80 billion, driven by strong advertising performance. Ad impressions climbed 14%, and the average price per ad increased 12%. However, total expenses jumped 55% to $42.03 billion, which included $2.40 billion in legal fees and $1.18 billion in severance payments. This cost surge led to a decline in operating income, which fell 8% to $18.78 billion, and net income dropped 14% to $15.85 billion.
The operating margin contracted to 31%, down from 43% in the same period last year. This compression reflects the heavy investment in AI infrastructure and other strategic initiatives. Despite these pressures, CEO Mark Zuckerberg emphasized that AI is accelerating the core business, and the advertising segment's growth supports this narrative.
Investors are closely watching the company's cash conversion. In the second quarter, Meta reported capital expenditures of $31.08 billion against $31.86 billion in operating cash flow, leaving free cash flow at just $784 million. This represents a cash conversion ratio of roughly 2.5% of capital spending. Management has guided for 2026 capital expenditures between $130 billion and $145 billion, with total expenses expected to reach $165 billion to $169 billion.
The company's user base continues to expand, with daily active people across its family of apps rising 3% to 3.60 billion. However, engagement growth is lagging behind the gains in ad impression volumes and pricing, suggesting that monetization is improving faster than user growth.
Analysts remain largely bullish on Meta's prospects. According to Benzinga, 30 of 36 analysts rate the stock a buy, with six holds. The average price target stands at $777, representing a 29.7% premium to the recent price. However, targets vary widely, from Wedbush's neutral $595 to Rosenblatt's buy-rated $886, which implies a 48% upside.
The broader market provided some support on Wednesday, with the S&P 500 rising 0.46% and the Nasdaq Composite up 0.45%. Trading volume in the U.S. reached 14.75 billion shares, below the 20-day average, indicating cautious investor sentiment.
Looking ahead, Meta forecasts third-quarter revenue between $61 billion and $64 billion. The company is scheduled to report its next earnings on October 28. Investors will be watching whether revenue growth can outpace the escalating costs, and whether the AI investments begin to translate into stronger free cash flow.
Risks remain, including the potential for prolonged AI spending to delay cash conversion, ongoing legal challenges related to youth safety, regulatory pressures, and softening advertising demand. A decisive break above $600 would signal renewed investor confidence, but sustained margin improvement is essential to justify the current valuation of 18.3 times forward earnings.
