Meta Platforms (NASDAQ:META) saw its stock decline sharply in premarket trading Thursday, falling 8.9% to $533.49, as the company's second-quarter earnings report revealed that artificial intelligence investments consumed the vast majority of its operating cash flow. The selloff, which erased billions in market value, was driven by investor concerns about cash flow dynamics rather than any weakness in the core advertising business.
Cash Flow Squeeze
Meta generated $31.86 billion in operating cash flow during the second quarter, but capital expenditures and finance-lease payments totaled $31.08 billion, representing 97.5% of operating cash flow. This left free cash flow at just $784 million, a staggering 91% decline from the $8.55 billion reported in the same period last year. Free cash flow now represents only 1.3% of revenue, compared to an 18.0% margin a year earlier.
The company's spending on infrastructure and AI development has accelerated dramatically. Capital expenditures and lease principal payments surged 82.7% year-over-year to $31.08 billion. Meta also raised the lower bound of its 2026 capital expenditure outlook to a range of $130 billion to $145 billion, with the midpoint about 90% higher than 2025 levels.
Revenue Growth Amid Rising Costs
Despite the cash flow concerns, Meta's top-line performance remained robust. Second-quarter revenue rose 28% to $60.80 billion, surpassing the FactSet consensus of $60.22 billion. Advertising revenue, which accounts for 97.6% of total revenue, grew 27.5% to $59.36 billion. Ad impressions increased 14%, and average pricing climbed 12%.
However, costs and expenses grew at nearly double the pace of revenue, rising 55.2% to $42.03 billion. This included $2.40 billion in legal-related charges and $1.18 billion in severance costs. Operating income fell 8.2% to $18.78 billion, though CFO Susan Li noted that excluding these one-time items, operating income would have climbed 9%. The operating margin contracted to 31% from 43% a year ago.
Earnings per share came in at $6.18, missing the consensus estimate of $7.19. Meta's midpoint revenue guidance for the third quarter of $62.5 billion also fell about $640 million below the preliminary consensus.
User Growth and Engagement
Meta's user base continued to expand, with daily active users across its family of apps growing 3% to 3.60 billion. This growth underscores the resilience of its social media platforms even as the company pivots heavily toward AI.
Capital Allocation Shift
A notable change in Meta's capital allocation strategy is evident. The company did not repurchase any shares during the quarter, after buying back $10.17 billion in the same period last year. Instead, Meta issued $24.91 billion in net debt to fund its investment push.
This shift has drawn comparisons to other tech giants. Microsoft Corp. (NASDAQ:MSFT) generated $19.6 billion in free cash flow last quarter, even with significant infrastructure investment, while Azure revenue grew 43%. Alphabet Inc. (NASDAQ:GOOGL) reported negative free cash flow of $5.86 billion as its capital expenditures exceeded operating cash flow.
Analyst and Investor Concerns
"Meta is spending like a hyperscaler without a hyperscaler's business model," said Josh Gilbert, an analyst at eToro. The key distinction is that Microsoft and Alphabet can monetize their infrastructure investments through mature cloud services, while Meta's AI monetization remains largely unproven.
CEO Mark Zuckerberg emphasized that "AI is accelerating our core business today" and outlined developments in personal agents, enterprise services, and potential compute sales. However, investors were given limited concrete revenue targets for these new initiatives.
Adding to the challenges, Meta faces potential legal risks from youth-focused court cases. Four U.S. states are pursuing $1.4 trillion in damages, alleging negative effects on young users, though Meta denies these claims.
The investment landscape for Meta has shifted. Growth in advertising is no longer sufficient; the company must improve cash conversion and demonstrate that its infrastructure can generate income beyond advertising.
