Meta Posts $2.12 Billion in Negative Free Cash Flow and Raises Spending
Key Facts
Meta shares fell 7% on October 22 after the company reported third-quarter revenue of $64.60 billion, above analysts’ average estimate of $63.34 billion, according to the Associated Press. At the same time, the company posted negative free cash flow of $2.12 billion, its first cash outflow in more than a decade, according to Reuters. The decline came as the company increased AI-related spending and raised the low end of its 2026 capital expenditure forecast. Revenue was up 26% from $51.24 billion in the same period a year earlier. The drop showed that sales growth had not dispelled investor concerns about the cost of expansion and how quickly it would translate into cash returns.
Sales growth was supported by increased advertising activity across the company’s apps: ad impressions rose 10% year over year in the third quarter, while the average price per ad increased 14%, according to Meta’s filing with the U.S. Securities and Exchange Commission. The average number of daily active people across Meta’s family of apps was 3.64 billion in September, up 3% from a year earlier. The company said its AI investments were already generating additional advertising revenue by boosting engagement, improving recommendations and increasing monetization efficiency. But it said returns on those investments would take longer than returns from investment in its core business. It added that broader revenue opportunities and improved internal efficiency support its confidence in AI’s long-term potential.
That growth was met by a sharp rise in expenses: costs and expenses increased 68% to $51.613 billion in the third quarter, from $30.707 billion a year earlier, according to the company’s filing. Operating income fell 37% to $12.988 billion from $20.535 billion, and operating margin dropped to 20% from 40%. Reported net income was $9.86 billion, and diluted earnings per share were $3.83. Expenses included a $9.89 billion legal charge related to an August 2026 agreement with state attorneys general in a lawsuit concerning youth health and social media. Meta said diluted earnings per share would have been $7.40 excluding the charge, which also raised its 2026 total expense forecast to a range of $175–179 billion.
Third-quarter capital expenditures, including the principal portion of finance lease payments, totaled $34.91 billion, while cash from operations reached $32.79 billion, according to the filing. Capital spending exceeding operating cash flow resulted in a $2.12 billion free cash flow deficit. Reuters said AI-related spending was behind Meta’s first cash outflow in more than a decade. The company raised its 2026 capital expenditure forecast to $135–145 billion from $130–145 billion, saying spending would support its core business and AI initiatives. The lower end of the forecast thus rose by $5 billion, while the upper end was unchanged.
Meta expects fourth-quarter 2026 revenue of $73–76 billion, and said it still expects full-year operating income to exceed the 2025 level excluding the legal charge recorded in the third quarter. On AI products, Mark Zuckerberg said more than 10 million people in the United States and Canada had created accounts on Muse, and about 25% of them use it on any given day. He added that the company expects to improve Muse’s cost efficiency by more than 10 times over the following year. The Associated Press forecast that Reality Labs’ losses would fall to about $15 billion in 2027 as the company directs investment to other areas, particularly AI. These forecasts put next quarter’s revenue, the cost of expansion and returns from new products at the center of investor scrutiny of the company’s results.
Concern also spread to the credit market: five-year credit default swaps on Meta debt reached a record 114.79 basis points on October 22, according to Reuters. In the stock market, the Nasdaq Composite fell 2.6% in the same session. Reuters estimated in its report that if the stock’s losses continued at the levels prevailing at publication time, they could erase about $114 billion from the company’s market value, an estimate conditional on the share price at that time. Meta shares closed at $697.52 on October 21 and $648.85 on October 22, according to EL7 data. The stock also fell 7% in the session following the results announcement, despite having risen 0.5% in regular trading on October 21 and gaining 2.9% in after-hours trading following the results.
As part of financing its expansion, Meta approved the creation of a new class of common stock, “Class C,” with no voting rights. The company said making it available could provide a tool to raise capital, fund acquisitions and compensate employees while preserving the voting power of existing shares. The board approved the capital structure amendment on October 19, and it received the required shareholder approval on October 20, according to the filing with the SEC. The company said the amended charter would take effect on January 19, 2027. The plan for the new class featured among the concerns accompanying the stock’s decline, along with higher capital spending and the shift to negative free cash flow. Spending and fourth-quarter revenue forecasts, together with the trajectory of AI returns, remain the main upcoming indicators the company presented to investors.