Social media giant Meta Platforms (META -1.31%) reported second-quarter results after the market closed Wednesday, and shares fell about 6% in after-hours trading as of this writing.
Revenue rose 28% year over year to $60.8 billion, and the advertising business behind it grew on both volume and pricing. The concern, however, sits further down the cash flow statement. Meta generated $31.9 billion in cash from operations during the quarter -- and kept just $784 million of it as free cash flow.
Nearly everything else went into the company's build-out of AI (artificial intelligence) infrastructure.
Here's a closer look at where the money went, and what it means for shareholders.
Image source: Getty Images.
Where the cash went
Free cash flow is operating cash flow minus capital expenditures, and Meta's capital expenditures for the quarter came to about $31.1 billion. That breaks down as $30.1 billion in purchases of property and equipment plus $962 million in principal payments on finance leases. Subtract all of it from $31.9 billion of operating cash flow, and $784 million is what remains. For perspective, Meta's free cash flow in the year-ago quarter was $8.5 billion.
And the spending is stepping up fast. Meta's capital expenditures were $19.8 billion in the first quarter, up more than 50% from the prior quarter.
Cash from operations, meanwhile, barely moved, coming in at $32.2 billion in Q1 and $31.9 billion in Q2. The operating side held steady. The spending is what changed, taking free cash flow from $12.4 billion in the first quarter to less than $1 billion in the second.
So what is the money buying? Data centers, mostly. When management raised its capital expenditure outlook in April (to a range of $125 billion to $145 billion, from $115 billion to $135 billion), it attributed the increase to "higher component pricing this year and, to a lesser extent, additional data center costs to support future year capacity." In other words, part of the bill isn't even new capacity. It's inflation in the parts that go into it.
Wednesday's report pushed the number higher again. Meta now expects 2026 capital expenditures of $130 billion to $145 billion, raising the low end of the range by $5 billion. That's the second time the range has moved up this year.
I'd argue the guidance matters more than the quarter itself. Meta has spent about $50.9 billion through June, so even the bottom of the new range implies roughly $40 billion of spending per quarter for the rest of the year. That's more than the company just spent in Q2, and more than a full quarter of its operating cash flow. If cash from operations holds near recent levels, free cash flow could turn negative in the second half.
Of course, the income statement felt some strain, too. Net income fell 14% year over year to $15.8 billion, and earnings per share declined 13% to $6.18. Additionally, management nudged its full-year expense outlook higher to $165 billion to $169 billion, with $2.4 billion of legal charges accounting for the increase.
NASDAQ: META
Key Data Points
Is the stock a buy after this drop?
For all the spending, the business it's meant to feed looks healthy. Ad impressions rose 14% year over year in the second quarter, and the average price per ad climbed 12%. And Meta's apps reached 3.60 billion daily active people in June, up 3% from a year ago.
With that said, revenue growth did decelerate, from 33% in the first quarter to 28%. But for a company generating more than $60 billion in quarterly revenue, 28% is a remarkable pace.
The balance sheet holds up its end as well. Meta ended June with $90.3 billion in cash and marketable securities -- a war chest that removes any doubt about whether the company can afford its build-out. What the market doubts is the return on it.
That doubt won't be settled this year. What investors can evaluate now is the price. After the after-hours drop, shares trade at about 20 times earnings (below the S&P 500's multiple of about 28), which is arguably a modest price for a business growing revenue 28% year over year.
Overall, I like the stock here. A business compounding at this rate rarely trades below the market's multiple, and the cash pile means the spending doesn't threaten the balance sheet. Sure, free cash flow may sit near zero for a few quarters, and it could even go negative. But I can live with that while the advertising numbers hold up this well. Of course, if revenue growth cools sharply while the spending range climbs again, I'd revisit.
