Meta’s AI gamble hits cash flow as investors question the price of the race
Facebook’s parent company reported a 91% plunge in free cash flow as it pours billions into AI infrastructure, raising concerns over when the investment will begin generating returns.
Meta Platforms reported a dramatic decline in second-quarter free cash flow on Wednesday, highlighting the growing financial pressure from the social media giant’s aggressive artificial intelligence infrastructure buildout and raising questions about how quickly the investments will translate into new revenue streams.
The Facebook and Instagram parent company generated just $784 million in free cash flow in the quarter ended June 30, down 91% from $8.55 billion a year earlier. The sharp decline sent Meta shares down 10% in extended trading.
The cash flow pressure echoed concerns surrounding Alphabet, which last week reported its first-ever quarter of negative free cash flow as investors reassessed the enormous costs associated with the AI race.
Meta CEO Mark Zuckerberg defended the spending on an earnings call, arguing that the company’s investments are aimed not only at improving existing products but also at building entirely new AI-driven businesses.
"We expect that a significant portion of our compute is going to go towards training our models, growing our core business and delivering personal agents and new products," Zuckerberg said. "But we also expect to grow a large business serving large customers as well."
Zuckerberg said Meta is betting that personal AI agents will become a major consumer technology category and argued that the company’s massive user base gives it a unique opportunity to commercialize AI products at scale.
However, the pressure on cash flow is reviving memories of Meta’s previous spending spree on the metaverse. The company’s Reality Labs division, which houses its virtual and augmented reality ambitions, has accumulated more than $80 billion in operating losses.
Meta’s free cash flow in the second quarter was its weakest since late 2022, when investors were similarly concerned about the company’s willingness to spend heavily on unproven technologies.
By contrast, Microsoft also reported a decline in free cash flow during the quarter, but investors responded positively after strong Azure cloud growth demonstrated that its AI investments were already supporting a high-margin business. Microsoft shares rose in after-hours trading.
Meta’s aggressive AI spending comes as the company seeks to diversify beyond its advertising business, which still accounts for the overwhelming majority of its revenue.
The company expects to spend between $130 billion and $145 billion on capital expenditures in 2026, raising the lower end of its previous forecast of $125 billion to $145 billion. At the beginning of the year, Meta had expected capital spending of between $115 billion and $135 billion.
The spending is part of an unprecedented AI infrastructure race among the largest technology companies, with Big Tech expected to invest more than $700 billion in AI-related infrastructure through 2026.
Meta is expected to allocate as much as $145 billion toward AI infrastructure this year, roughly double its investment last year.
The company is also rapidly expanding its computing capacity. According to previous reports, Meta plans to double its computing power to 7 gigawatts this year and again to 14 gigawatts next year. It currently operates or is building 32 data centers globally.
"Meta's AI spend was easier to celebrate when margins were expanding. It's harder to celebrate now that the costs are showing up in the numbers," said Mike Proulx, a senior executive at research firm Forrester. "Meta isn't spending billions on AI infrastructure just to make Facebook and Instagram better. The company believes AI can create entirely new businesses."
Despite the concerns over AI spending, Meta’s core business remains strong.
Revenue jumped 28% year-over-year to $60.8 billion, marking the company’s fastest growth rate since the fourth quarter of 2021, excluding the first quarter of 2026.
Usage across Meta’s platforms also increased, with the company reporting 3.6 billion daily active people, up 3% from a year earlier.
However, earnings per share came in at $6.18, below analysts’ average expectation of $7.22, according to LSEG data.
"Meta's underlying ad business that's financing everything is still performing well and is our main focus," said Luke Stillman, managing director at research firm Madison and Wall.
Alongside AI investments, Meta continues to face regulatory and legal challenges related to its core social media business.
The company disclosed in a court filing this month that four U.S. states are seeking $1.4 trillion in penalties over allegations that Facebook and Instagram were designed to encourage addictive usage among young users and that Meta misled the public about platform safety.
Meta warned earlier this year that regulatory action in the U.S. and Europe related to youth safety issues could materially affect its business and financial results.
Chief Financial Officer Susan Li said legal scrutiny remained elevated, with several youth-related trials scheduled in the U.S. this year that could result in a "material loss."
The company also absorbed severance costs from a major restructuring aimed at reorganizing Meta around AI. In May, Meta cut approximately 10% of its workforce, or about 8,000 employees.
Li said second-quarter operating income would have increased 9% year-over-year without legal charges and severance expenses. Instead, operating income declined 8%.
