Rising AI Costs Weigh on Meta Despite Strong Ad Growth

Meta’s AI Spending Puts Cash Flow in Focus

Meta Platforms (META) fell about 9% Thursday after its second-quarter results intensified investor concerns about the cost of its AI expansion. Revenue rose 28% year over year to a record $60.8 billion, ahead of the $60.2 billion consensus, but earnings and cash flow came under pressure.

Diluted earnings were $6.18 per share, below Wall Street expectations of about $7.14. Capital expenditures reached $31.08 billion during the quarter, while free cash flow fell to $784 million from roughly $8.6 billion a year earlier. Meta also raised the lower end of its 2026 capital spending outlook and provided third-quarter revenue guidance whose midpoint came in below expectations.

Key Points

• Meta revenue increased 28% to a record $60.8 billion, while advertising revenue reached about $59.3 billion and exceeded expectations.
• Earnings of $6.18 per share missed estimates as total costs increased sharply, including $2.4 billion in legal charges and about $1.2 billion in severance expenses.
• Capital expenditures reached $31.08 billion and free cash flow fell to $784 million as Meta continued its large AI infrastructure buildout.

Advertising Growth Remains Strong as Costs Accelerate

Meta's core advertising business continued to expand during the second quarter.

Family of Apps advertising revenue rose 27% year over year to $59.4 billion, supported by a 14% increase in ad impressions and a 12% increase in average price per ad. AI-enhanced ad ranking contributed to an 8.3% increase in Facebook ad clicks and a 15.7% improvement in conversions.

More than 9 million small businesses now use at least one of Meta's AI advertising creative tools, showing that AI is already contributing to the company's existing advertising platform.

That revenue strength was offset by a sharp increase in expenses. Total costs and expenses climbed 55% to roughly $42 billion. The quarter included $2.4 billion in legal charges and about $1.2 billion in severance costs related to headcount reductions.

GAAP operating income fell 8% year over year to $18.8 billion, with operating margin at 31%. Management said operating income would have increased 9% excluding the legal and severance charges.

Research and development costs also increased 67%, reflecting the broader investment burden as Meta expands its AI infrastructure and products.

Why Did Meta Stock Fall After Earnings?

The market reaction centered on the gap between Meta's strong core business and the rising cost of its AI strategy.

Meta generated $60.8 billion in quarterly revenue, beating expectations, but earnings of $6.18 per share fell short of the roughly $7.14 consensus. Free cash flow declined to just $784 million as quarterly capital expenditures reached $31.08 billion.

Meta also raised the lower end of its 2026 capital expenditure forecast. The supplied material cites an updated range of $135 billion to $145 billion, compared with an earlier range of $125 billion to $145 billion.

The company did not provide specific capital expenditure guidance for 2027. CFO Susan Li said infrastructure planning remains highly dynamic and that multiple outcomes remain possible even within the current year's outlook.

Third-quarter revenue is expected to range from $61 billion to $64 billion. The midpoint of $62.5 billion is below the $63.1 billion Wall Street expectation cited in the source material.

Investors also received few firm details about the possibility of monetizing excess computing capacity. CEO Mark Zuckerberg said Meta could potentially sell compute and had received significant interest, but the company made no commitment to pursue that business.

The contrast with Microsoft (MSFT) was particularly visible in Thursday's price action. Microsoft shares surged after reporting accelerating Azure growth and clearer evidence that its infrastructure spending was translating into cloud revenue, while Meta shares declined as investors focused on rising costs and limited visibility into returns from newer AI investments.

AI Adoption Grows as Meta Expands Beyond Advertising

Meta's AI investments are already contributing to advertising performance, but the company is also developing additional products that could expand its AI presence beyond its core ad business.

More than 1 million businesses use Meta business agents each week, while daily interactions with Meta AI increased 60% following the assistant's rebuild. Meta is also developing personal AI agents and launching agent and developer tools for enterprise customers.

The company is competing in advanced AI models while considering potential subscriptions, APIs, developer tools, enterprise products and direct compute services.

Demand for computing infrastructure remains substantial. Zuckerberg told investors there is "nowhere near enough compute for all the demand."

That demand is driving Meta's infrastructure expansion, but it is also contributing to higher depreciation, infrastructure, cloud and compensation expenses. The financial question is increasingly centered on how quickly those investments can produce returns beyond improvements to Meta's advertising business.

Reality Labs remains another expense. The segment recorded a $4.62 billion loss on $431 million of revenue during the quarter.

Legal risks add another variable. Meta said it continues to face scrutiny related to youth social-media use, with several U.S. trials scheduled for this year that could result in material losses.

What It Means for Investors

Meta's second-quarter results showed two very different sides of the business.

The company's advertising engine remains strong. Revenue grew 28% to a record $60.8 billion, Family of Apps advertising revenue increased 27%, and AI tools are improving ad clicks and conversions. Engagement with Meta's AI products is also growing, while business adoption of AI agents and advertising tools continues to expand.

The financial cost of that expansion, however, is becoming increasingly visible.

Quarterly capital expenditures reached $31.08 billion, while free cash flow fell from roughly $8.6 billion a year earlier to $784 million. Meta also raised the lower end of its full-year capital spending outlook while declining to provide specific guidance for 2027.

The earnings miss was heavily affected by legal and severance charges, but recurring infrastructure and compensation costs are also increasing as the company builds data centers and expands its AI capabilities.

That puts greater attention on returns from Meta's investment. AI is already supporting advertising performance, but management provided less clarity about when newer businesses such as enterprise agents, APIs, subscriptions, developer tools or compute services could become financially significant.

For META stock, the second-quarter earnings reaction reflects that tension: strong advertising growth and expanding AI adoption alongside rapidly rising investment and much weaker free cash flow.

Conclusion

Meta's core business delivered another quarter of strong growth, but the company's AI investment cycle dominated the market reaction.

Revenue increased 28% to $60.8 billion, advertising revenue remained strong, and AI-powered improvements continued to support ad performance. At the same time, total expenses climbed sharply, earnings fell below expectations, and free cash flow dropped to $784 million as capital expenditures reached more than $31 billion.

Meta is continuing to build computing capacity while developing AI agents, enterprise tools and advanced models. Management also sees demand for additional compute, but offered few firm details on potential external monetization or 2027 spending.

The next phase of Meta's AI strategy will therefore be measured not only by adoption and revenue growth, but also by how those developments compare with the scale of infrastructure and operating costs supporting them.

FAQs

Why did Meta stock fall after Q2 earnings?

Meta stock fell about 9% after earnings of $6.18 per share missed expectations, free cash flow dropped to $784 million, capital spending remained elevated, and the midpoint of third-quarter revenue guidance came in below Wall Street expectations.

How much revenue did Meta generate in the second quarter?

Meta generated record second-quarter revenue of $60.8 billion, up 28% year over year and above the $60.2 billion consensus estimate.

How much is Meta spending on AI infrastructure?

Meta reported $31.08 billion in second-quarter capital expenditures. The supplied material cites an updated 2026 capital expenditure range of $135 billion to $145 billion, with the lower end increased from $125 billion.

Why did Meta’s free cash flow fall so sharply?

Meta's free cash flow fell to $784 million from roughly $8.6 billion a year earlier as capital expenditures reached $31.08 billion amid heavy spending on servers, data centers, network infrastructure and other AI-related capacity.

Is Meta already making money from AI?

AI is already supporting Meta's advertising business through improved ad ranking and performance. AI-enhanced ad ranking contributed to higher Facebook ad clicks and conversions, while more than 9 million small businesses use at least one Meta AI advertising creative tool.

This article was created with AI assistance and reviewed by an editor. For details, please refer to our Terms of Use.

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