Meta Shares Climb Nearly 2% After Steep Drop as AI Spending Hits Cash Flow Despite Robust Ad Growth

NEW YORK — Meta Platforms Inc. shares rose nearly 2% on Friday to $548.78, gaining $9.74, as the stock found some footing a day after plunging on second-quarter results that highlighted the heavy financial toll of the company's aggressive artificial intelligence investments.

The rebound came after Meta reported strong advertising revenue growth but a sharp contraction in free cash flow and a profit miss driven by elevated expenses. Investors had sent the shares down roughly 8% on Thursday following the release, reflecting ongoing concerns about the pace of capital spending required to support Meta's AI ambitions even as its core advertising business continues to expand.

Meta reported revenue of $60.8 billion for the quarter ended June 30, an increase of 28% from $47.5 billion a year earlier and above analysts' consensus estimates near $60.2 billion. Advertising revenue, which accounts for the vast majority of sales, rose 27% to $59.4 billion. Ad impressions delivered across Meta's Family of Apps increased 14% year over year, while the average price per ad rose 12%.

Family daily active people reached 3.60 billion on average in June, up 3% from a year earlier. Family of Apps other revenue, which includes WhatsApp paid messaging and subscriptions, jumped 73% to $1.0 billion, crossing the $1 billion mark for the first time in a quarter. Reality Labs revenue was $431 million, up 16%, driven by growth in AI glasses sales that partially offset lower Meta Quest headset volumes.

Despite the top-line strength, net income fell 14% to $15.8 billion, or $6.18 per diluted share, missing Wall Street expectations that clustered around $7.14 to $7.22. Operating income declined 8% to $18.8 billion, and the operating margin contracted to 31% from 43% a year earlier.

Total costs and expenses surged 55% to $42.0 billion. The increase included $2.4 billion in charges related to legal proceedings and $1.18 billion in severance expenses tied to a May headcount reduction of roughly 8,000 employees as the company shifted resources toward AI priorities. Research and development expenses rose sharply. Excluding the legal and severance items, operating income would have increased 9% year over year, according to Chief Financial Officer Susan Li.

Capital expenditures, including principal payments on finance leases, reached $31.1 billion in the quarter. Free cash flow fell to $784 million from $8.55 billion a year earlier, a 91% decline, as the company poured money into data centers and computing infrastructure.

"AI is accelerating our core business today, powering our next generation of products, and opening the door to entirely new enterprise opportunities," Meta founder and Chief Executive Mark Zuckerberg said in the company's statement. "The results are already showing, and I'm optimistic about the potential ahead."

On the earnings call, Zuckerberg and Li emphasized that AI investments are already delivering measurable gains in the advertising business through improved recommendations, ranking and ad targeting. Li noted that large language models are contributing to more precise ad matching, with management citing an 8.3% increase in ad clicks and a 15.7% uplift in conversions on Facebook in certain measurements.

Meta raised the lower end of its full-year 2026 capital expenditure outlook to a range of $130 billion to $145 billion from a prior range of $125 billion to $145 billion. The company said it remains focused on maximizing capacity through 2026 and 2027 while preserving flexibility for decisions further out. Li said Meta is currently demand-constrained on compute and expects that dynamic to continue for the foreseeable future, with numerous high-return opportunities for additional capacity.

For the third quarter, Meta guided total revenue to a range of $61 billion to $64 billion, assuming an approximately 1% headwind from foreign currency. The midpoint of that range came in below some analyst forecasts. Full-year 2026 total expenses are now expected between $165 billion and $169 billion, reflecting the second-quarter legal charges. The company continues to expect full-year operating income to exceed the 2025 level.

Reality Labs posted an operating loss of about $4.6 billion in the quarter. Cumulative losses in the segment have exceeded $80 billion as Meta continues to invest in virtual and augmented reality hardware and software alongside its AI efforts.

Cash, cash equivalents and marketable securities stood at $90.3 billion at quarter-end. Long-term debt rose to $83.7 billion. Meta also flagged ongoing legal and regulatory risks, including youth-related matters and scheduled U.S. trials that could result in material losses.

The results arrived as investors across the technology sector closely scrutinize the returns on massive AI infrastructure spending by the largest companies. While peers with substantial cloud businesses have been able to point to accelerating high-margin revenue growth tied to those investments, Meta's spending is primarily directed at enhancing its advertising engine, developing personal AI agents and exploring enterprise opportunities, including potential compute services for large customers.

Shares had closed at $539.03 on Thursday after the initial sell-off. The Friday advance partially recovered some of those losses amid broader market gains and a more measured assessment of the underlying advertising trends. Meta's stock has been under pressure for much of the year amid the elevated capital intensity of its AI strategy.

Analysts and investors continue to weigh the near-term pressure on margins and cash flow against the longer-term potential of AI-driven engagement and monetization improvements across Facebook, Instagram, WhatsApp and emerging products. The company has argued that the investments are already producing visible benefits in user engagement and advertiser performance, even as the full payoff from new AI products and enterprise offerings remains further in the future.

Meta's performance underscores the divergent paths Big Tech companies are taking in the AI build-out. For the social media giant, the core advertising business remains robust and is benefiting from AI enhancements, yet the scale of infrastructure spending required to stay competitive is compressing free cash flow and testing investor patience on the timeline for broader returns.