Meta Platforms Inc. saw its stock decline as much as 10% in after-hours trading Wednesday, erasing over $100 billion in market value, after second-quarter results revealed weakening profit, a sharp drop in free cash flow, and escalating AI-related spending that overshadowed record revenue growth.
Revenue rose 28% year-over-year to $60.8 billion, driven by a 27% increase in advertising revenue to $59.4 billion. Ad impressions grew 14%, and the average price per ad climbed 12%. Daily active users across Meta's family of apps reached 3.6 billion. However, net income fell 14% to $15.9 billion, and earnings per share of $6.18 missed the FactSet consensus of $7.19.
The core advertising business remains robust, but investors are increasingly focused on Meta's surging cost base. Quarterly expenses jumped 55% to $42 billion, including $2.4 billion in legal charges and $1.2 billion in severance costs. Free cash flow plummeted 91% to just $784 million, a stark contrast to the strong cash generation that has historically been a key investment thesis for the stock.
Meta narrowed its 2026 capital expenditure forecast to $130 billion-$145 billion, raising the floor from the previous $125 billion-$145 billion range. Third-quarter revenue guidance of $61 billion-$64 billion implies growth of about 22% at the midpoint, a notable deceleration from the June quarter's 28% pace. D.A. Davidson analyst Gil Luria retained a Buy rating but cut his price target to $700 from $850, calling the outlook a "significant top-line deceleration."
Despite the bearish reaction, RBC Capital Markets analyst Brad Erickson offers a contrarian view. In a note published before the earnings release, Erickson described Meta as the "biggest opportunity for narrative improvement" among hyperscalers. He argues that investors are overly focused on infrastructure costs while underestimating the potential of subscription products, small business services, custom chips, and a nascent Meta Compute business that could sell excess computing capacity.
Erickson believes that commentary around custom chips and Meta Compute could drive a significant narrative shift. However, he cautioned that management needs to provide concrete metrics, clear use cases, and a credible timeline for scaling these businesses before sentiment can improve. Currently, advertising still accounts for approximately 98% of Meta's quarterly revenue, leaving its AI-driven opportunities commercially interesting but financially unproven.
The broader tech landscape shows similar dynamics. For instance, Microsoft's Q4 earnings beat was driven by 43% Azure growth and AI adoption, while Samsung stock surged 8% on record chip profits, highlighting the market's appetite for AI-related revenue. Meta must now demonstrate that its massive AI investments can generate meaningful revenue, rebuild free cash flow as exceptional costs ease, and create new businesses capable of supporting annual capital expenditure of up to $145 billion.
Analysts say the path forward requires Meta to turn its AI infrastructure into new revenue streams, such as selling excess computing capacity or offering paid AI services and business agents. Until then, the market's skepticism may persist, even as the company's core advertising machine continues to deliver record results.
This article is for informational purposes only and does not constitute financial advice.
