Meta cash flow drops 91% amid AI spending push

Meta Platforms reported a sharp decline in second-quarter free cash flow as the company continued its aggressive spending on artificial intelligence infrastructure, raising concerns among investors about the financial impact of its costly AI expansion.

The Facebook and Instagram parent company posted free cash flow of $784 million for the quarter ended June 30, down 91% from $8.55 billion a year earlier. The decline pushed Meta shares down 10% in extended trading.

The drop in cash flow followed a similar trend at Alphabet, which last week reported its first-ever cash-flow-negative quarter, surprising investors who had been optimistic about the returns from major technology companies’ AI investments.

Meta CEO Mark Zuckerberg said the company expects much of its computing power to support AI model training, improve its core businesses, and develop new products, including personal AI agents.

"We expect that a significant portion of our compute is going to go toward training our models, growing our core business and delivering personal agents and new products," Zuckerberg said during the earnings call. "We also expect to grow a large business serving large customers as well."

Zuckerberg defended the company’s AI strategy despite repeated questions from analysts about the scale of its investments and when they would generate returns. He said Meta believes personal AI agents could become a major consumer business and that the company is well-positioned to commercialize the technology at scale.

Meta’s free cash flow was the lowest since late 2022, when investors raised concerns over the company’s heavy spending on its metaverse ambitions. Its Reality Labs division, which focuses on virtual and augmented reality products, has accumulated more than $80 billion in operating losses.

Meanwhile, Microsoft reported a 23% year-over-year decline in free cash flow for the June quarter. However, strong growth in its cloud business eased investor concerns, with its shares rising 4.4% in after-hours trading.

Heavy AI spending

Meta’s increased spending on AI infrastructure comes as the company seeks to expand beyond its advertising-dependent business model.

The company reported second-quarter earnings per share of $6.18, missing analysts’ average estimate of $7.22, according to data compiled by LSEG.

"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," he added.

Meta expects to spend as much as $145 billion on AI infrastructure this year, nearly double its investment from last year. The company’s spending represents a significant portion of the more than $700 billion that major technology companies are expected to invest in AI in 2026.

Reuters reported that Meta plans to double its computing capacity to 7 gigawatts this year and increase it further to 14 gigawatts next year. The company currently operates or is building 32 data centers worldwide.

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

Despite the spending pressure, Meta reported strong revenue growth. Second-quarter revenue rose 28% to $60.8 billion, marking its fastest growth pace since the fourth quarter of 2021, excluding the first quarter of 2026.

The company said usage of its apps recovered after a decline in April, with 3.6 billion daily active users, up 3% from a year earlier.

"Meta's underlying ad business that's financing everything though is still performing well and is our main focus," said Luke Stillman, managing director at research firm Madison and Wall.

Legal challenges

While investors continue to monitor Meta’s AI investments, the company is also facing legal challenges tied to its core social media business.

Meta said in a court filing this month that four states were seeking $1.4 trillion in penalties over allegations that Facebook and Instagram were designed to encourage addictive use among young users and that the company misled the public about platform safety.

The company previously warned that regulatory and legal actions in the European Union and the United States related to youth social media concerns could significantly affect its business and financial performance.

Meta said it continued to face regulatory scrutiny during the second quarter. The company also recorded severance expenses from a major restructuring effort aimed at reorganizing its operations around AI.

In May, Meta cut about 10% of its workforce, or roughly 8,000 employees, as part of the restructuring.

Chief Financial Officer Susan Li said second-quarter operating income would have increased 9% year over year without legal charges and severance costs. Instead, operating income declined 8%.

"We continue to see scrutiny on youth-related issues in several markets and have a number of youth-related trials scheduled for this year in the U.S., which may ultimately result in a material loss," Li said in the company’s earnings statement. -Reporting by Katie Paul in New York and Jaspreet Singh in Bengaluru; Editing by Nia Williams, Sayantani Ghosh and Jamie Freed/Reuters