Meta Platforms reported disappointing second-quarter earnings, with net income falling 14% year-over-year to $15.8 billion, missing Wall Street expectations. This decline was largely attributed to $2.4 billion in legal charges and $1.2 billion in severance costs from May layoffs. Despite the profit dip, revenue climbed 28% to $60.8 billion, exceeding estimates, driven by the strength of its advertising business.
The company's free cash flow plummeted to $784 million in the second quarter, a stark 91% decrease from $8.5 billion a year earlier. This significant reduction is a direct consequence of Meta's aggressive spending on artificial intelligence infrastructure, including data centers and chips. Meta now anticipates full-year capital expenditures to range from $130 billion to $145 billion, a revised forecast that is higher than previous estimates and nearly double its 2025 spending. This scale of AI investment has led to investor skepticism, with Meta's stock dropping as much as 12% in after-hours trading.
Meta also provided a lower-than-expected revenue guidance for the third quarter, projecting between $61 billion and $64 billion, compared to analyst expectations of $63.15 billion. The company hinted at a new cloud computing business, intending to rent out its vast computing power, with CEO Mark Zuckerberg stating there are offers "at a meaningful premium" for its compute resources. However, analysts like Minda Smiley note that this push into AI's B2B opportunities might be challenging for Meta, given its existing reputational issues and its position as a latecomer in the cloud space compared to rivals like Microsoft.
Comparisons were drawn to Alphabet (Google), which also experienced negative free cash flow due to AI investments, spooking Wall Street. Analysts like Thomas Monteiro emphasized that the market is re-pricing a deteriorating free cash flow outlook, which is poorly received in an environment of higher capital costs. Meta's substantial legal challenges, including potential $1.4 trillion in penalties over accusations of designing platforms to addict young users, further compound investor concerns about the company's financial future.
In essence, while Meta's core ad business shows strength, the massive AI spending, coupled with one-time charges and ongoing legal battles, is significantly impacting its profitability and free cash flow, leading to investor unease and a reevaluation of its spending strategy.
