Meta Stock Sinks 7% as AI Spending and Negative Free Cash Flow Overshadow Record Revenue

Key Takeaways

• Meta stock fell 7% to $648.85 despite record quarterly revenue of $64.6 billion, up 26% from a year earlier.
• Capital expenditures reached $34.91 billion, exceeding operating cash flow and pushing quarterly free cash flow to negative $2.12 billion.
• Meta expects 2026 capital spending of $135 billion to $145 billion and plans to continue investing aggressively in AI infrastructure in 2027.
• A $9.89 billion legal charge reduced operating income, while the creation of non-voting Class C shares raised concerns about future financing and shareholder dilution.

Meta Platforms shares sank 7% on Thursday as investors looked beyond record revenue and focused instead on the rapidly rising cost of the company’s artificial intelligence strategy.

Meta stock closed at $648.85, down 6.98%, after trading as low as $639.73. The decline erased approximately $125 billion from the Facebook parent’s market value and contributed to a broader technology sell-off that pushed the Nasdaq Composite down 2.6%.

The sharp reversal followed an initially positive response to Meta’s third-quarter results. Revenue reached a record $64.6 billion, increasing 26% year over year and exceeding Wall Street forecasts. However, record capital spending caused free cash flow to turn negative, intensifying concerns about how long investors must wait before Meta’s AI investments generate returns large enough to justify their cost.

Meta’s Q3 Revenue Reaches a Record $64.6 Billion

Meta’s core advertising business continued to expand at a strong pace during the third quarter.

Advertising revenue rose 26% to $63.06 billion. The number of advertisements shown across Meta’s apps increased 10%, while the average price per advertisement climbed 14%.

The company’s Family of Apps, which includes Facebook, Instagram, WhatsApp and Messenger, generated $64.16 billion in revenue. Average daily users across Meta’s platforms increased 3% to 3.64 billion.

The combination of higher engagement, improved advertising tools and rising ad prices demonstrates that Meta’s underlying business remains healthy. Management said AI-powered recommendations and advertising systems are already improving engagement and monetization.

However, revenue growth was accompanied by a much faster increase in costs. Total expenses jumped 68% to $51.61 billion, causing reported operating income to fall 37% to $12.99 billion. Meta’s operating margin narrowed to 20% from 40% a year earlier.

Negative Free Cash Flow Raises Questions About AI Spending

The most closely watched figure was Meta’s negative $2.12 billion in quarterly free cash flow, compared with positive free cash flow of $10.63 billion in the same period last year.

Operating activities generated $32.79 billion in cash, but purchases of property and equipment reached $33.94 billion. An additional $964 million was used for principal payments on finance leases.

Together, those investments exceeded the cash generated by Meta’s operations, producing the free-cash-flow deficit. Capital expenditures, including finance lease payments, totaled $34.91 billion for the quarter.

The result does not indicate that Meta’s advertising business is losing money. Instead, it shows that spending on data centers, chips, energy capacity and other AI infrastructure is consuming cash faster than the company’s operations are currently producing it.

Meta still held $82.45 billion in cash, cash equivalents and marketable securities at the end of September, giving it substantial financial resources. Nevertheless, the negative free-cash-flow figure marked an important change for investors accustomed to Meta generating large amounts of excess cash.

Meta Plans Up to $145 Billion in 2026 Capital Spending

Meta narrowed its full-year capital expenditure forecast to between $135 billion and $145 billion, compared with its previous range of $130 billion to $145 billion.

The higher lower bound indicates that spending is likely to finish near the upper end of the company’s earlier estimate. Meta also warned that aggressive investment will continue into 2027 as it expands the infrastructure required to train and operate advanced AI models.

Chief Executive Mark Zuckerberg argued that those investments are already improving recommendations, advertising performance and user engagement. Meta is also developing new revenue opportunities around Muse, Muse Wonder and other AI products.

Management acknowledged, however, that investments in frontier models and AI infrastructure will take longer to generate returns than improvements to Meta’s established advertising business.

That timing gap is central to the stock’s decline. Investors are not questioning whether Meta can grow revenue. They are questioning whether the incremental earnings produced by AI will eventually exceed the enormous cost of developing and operating the technology.

Legal Charge Cuts Operating Profit

Meta’s reported earnings were also affected by a $9.89 billion charge connected to an agreement with 52 US attorneys general over litigation involving social media and teenage mental health.

Including the charge, Meta reported operating income of $12.99 billion and diluted earnings of $3.83 per share.

Excluding it, operating income would have been approximately $22.88 billion, while diluted earnings would have reached $7.40 per share. The distinction suggests that the weakness in reported profit was partly caused by a non-recurring legal expense rather than a collapse in Meta’s core operations.

Net income still rose to $9.86 billion from $2.71 billion a year earlier, when an unusually high tax provision reduced earnings.

Reality Labs remained another drag on profitability. The metaverse division generated only $443 million in revenue and recorded a $4.13 billion operating loss. Meta expects the unit’s full-year 2026 loss to total between $18 billion and $19 billion, although management forecasts that losses will narrow to approximately $15 billion next year.

New Class C Shares Add Financing and Dilution Concerns

Meta also announced the creation of publicly traded, non-voting Class C common stock, scheduled to take effect in January 2027.

The new shares could be used to raise capital, compensate employees, finance acquisitions and fund infrastructure investment without weakening Zuckerberg’s voting control. Shareholders are expected to receive one Class C share for every existing Class A or Class B share, producing an economic effect similar to a two-for-one stock split.

Although the initial distribution would not change investors’ proportional ownership, future issuance could dilute existing shareholders. The announcement reinforced the market’s perception that Meta may increasingly rely on external capital to finance its AI expansion.

Strong Revenue Outlook Fails to Reassure Investors

Meta forecast fourth-quarter revenue of $73 billion to $76 billion, pointing to continued strength in digital advertising and user engagement.

The company also expects 2026 operating income, excluding the legal charge, to exceed its 2025 result. Management believes AI-enhanced recommendations and advertising tools can support strong revenue growth throughout 2027.

Those projections offer a bullish argument for Meta stock: its advertising engine is expanding, AI is already improving monetization, and the company has enough liquidity to finance its strategy.

The bearish argument is that capital spending is rising faster than cash generation, the timeline for returns remains uncertain and Meta may eventually issue additional shares to finance its ambitions.

The next major test will be whether free cash flow recovers during the fourth quarter. Sustained revenue growth combined with moderating infrastructure spending could restore confidence. Another quarter of negative cash flow, however, would strengthen concerns that Meta’s AI expansion is becoming increasingly expensive for shareholders.