Meta shares fell 6% after reporting negative free cash flow and raising capital expenditure guidance to $145 billion, signaling investor concerns over aggressive AI investments.
By Adam Makins·
Meta’s stock price took a sharp hit on Thursday, sliding roughly 6% as investors digested some uncomfortable truths about the company’s AI ambitions. The social media giant reported negative free cash flow of $2.12 billion during the third quarter, a troubling sign for a company that has historically been a cash-generation machine.
What makes this particularly alarming to Wall Street is the trajectory. Meta raised the floor of its full-year capital expenditure guidance from $130 billion to $135 billion, with the ceiling now pegged at $145 billion. That’s a staggering amount of money being poured into infrastructure and AI infrastructure specifically, and investors are starting to question whether the company’s AI spending plans will actually pay off.
The bond market is sending a clear distress signal. The spread on Meta’s five-year credit default swaps hit all-time highs on Thursday. For those unfamiliar with CDS spreads, they essentially reflect how risky investors think a company’s debt is. Higher spreads mean higher perceived risk. When a company as established as Meta sees its CDS spreads reach new highs, it signals that credit investors are genuinely worried about the company’s financial trajectory.
This isn’t just about near-term profitability either. The company is essentially betting billions that its AI initiatives will drive future growth and competitive advantage. But until those investments translate into real returns, Meta is burning cash at a rate that’s making sophisticated investors nervous.
Meanwhile, Meta announced a novel solution to a very specific problem: CEO Mark Zuckerberg might leave California if the proposed “Wealth Tax” passes. According to the SEC filing, Zuckerberg “could become liable for a significant, multi-billion-dollar tax payment based on his ownership of stock in the Company.” The company’s answer was to create a new class of nonvoting Class C common stock designed to maintain the founder-led structure while giving the company “the ability to finance its growth.”
The filing explicitly noted that this new stock structure was meant to convince Zuckerberg to stay in California. It’s a remarkable admission that the company engineered its capital structure partly to keep its CEO from relocating, which speaks volumes about how critical continuity is to Meta’s current strategy.
Not everything was bad news, though. Meta’s third-quarter revenue jumped 26% year-over-year, hitting $64.60 billion and beating the $63.37 billion analyst consensus. Yet the earnings per share picture was muddier. Meta reported $3.83 per share, though it’s unclear how directly comparable that figure is to the $5.75 Wall Street was anticipating.
This mixed business performance tells the story of a company caught between two narratives. On one hand, the core advertising business remains remarkably strong, with revenue growth that would make most companies jealous. On the other hand, the massive capex commitments and negative free cash flow suggest management is prioritizing long-term bets over near-term profitability.
The question for investors becomes whether Meta’s AI spending will prove as transformative as leadership believes. The company is essentially mortgaging its current cash generation on the belief that artificial intelligence will unlock new revenue streams and competitive moats that justify the enormous investment.
There’s a certain irony in Meta’s situation. The company has been celebrated for its ability to monetize user attention at scale through targeted advertising. Now, it’s gambling that AI capabilities will become so valuable that the traditional advertising model will pale in comparison. It’s an audacious bet, but with credit markets already signaling concern and free cash flow turning negative, the window to prove the thesis is closing. When even the most successful tech companies start burning cash and issuing new share classes to keep their founders happy, it’s worth asking whether the foundation is as solid as the stock price once suggested.
Source: CNBC
