Meta revenue climbs but AI costs slash cash flow

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Meta Platforms reported a steep decline in free cash flow for the second quarter as the company continued to increase spending on artificial intelligence infrastructure, highlighting the financial impact of its long-term AI strategy.

The parent company of Facebook and Instagram posted free cash flow of $784 million for the quarter ended 30 June, compared with $8.55 billion during the same period last year. The results led to a 10% drop in Meta's shares in extended trading.

Meta's cash flow decline follows a similar trend seen at Alphabet, which last week reported its first cash-flow-negative quarter as major technology companies continue to invest heavily in AI development.

During the earnings call, Chief Executive Officer Mark Zuckerberg said the company expects a significant share of its computing resources to support AI model training, strengthen its core business, develop personal AI agents, and provide services to large customers. He said Meta's investments reflect its belief that personal AI agents will become a major consumer business and that the company is well positioned to commercialize the technology despite the short-term costs.

The company's free cash flow reached its lowest level since late 2022, when investors questioned Meta's heavy spending on its metaverse ambitions. Its Reality Labs division has accumulated more than $80 billion in operating losses.

Meta also reported earnings per share of $6.18, falling short of analysts' average estimate of $7.22, according to LSEG data.

The company expects to spend up to $145 billion on AI infrastructure this year and raised the lower end of its 2026 capital expenditure forecast to between $130 billion and $145 billion, up from the previous range of $125 billion to $145 billion. Earlier this year, Meta had projected spending between $115 billion and $135 billion.

According to Reuters, Meta plans to double its computing power to 7 gigawatts this year and expand it again to 14 gigawatts next year. The company currently has 32 data centres operating or under construction worldwide.

Despite rising costs, Meta reported strong revenue growth. Second-quarter revenue increased 28% to $60.8 billion, marking its fastest growth rate since the fourth quarter of 2021, excluding the first quarter of 2026. Daily active users across Meta's platforms rose 3% year over year to 3.6 billion.

Mike Proulx, a senior executive at research firm Forrester, said investors previously welcomed Meta's AI spending while profit margins were expanding, but growing costs are now becoming more visible. He added that the company's AI investments are aimed at creating entirely new businesses beyond improving Facebook and Instagram.

Luke Stillman, managing director at Madison and Wall, said Meta's advertising business remains strong and continues to provide the financial support for its broader AI investments.

Alongside investor concerns over AI spending, Meta continues to face legal challenges. The company disclosed that four US states are seeking $1.4 trillion in penalties over allegations that Facebook and Instagram were designed to encourage addiction among young users while misleading the public about platform safety.

Meta also warned that regulatory scrutiny in both the United States and the European Union over youth social media issues could have a significant impact on its business and financial performance. The company said it continues to face such investigations.

In addition, Meta incurred severance costs as part of a restructuring focused on expanding its AI operations. In May, the company laid off about 10% of its workforce, or approximately 8,000 employees.

Chief Financial Officer Susan Li said operating income would have increased 9% from a year earlier if legal charges and restructuring costs were excluded. Instead, operating income declined 8% during the quarter. She also said the company expects continued legal scrutiny over youth-related issues, with several trials scheduled in the United States this year that could result in significant financial losses.