Key takeaways
- Meta shares fall nearly 6% despite record quarterly revenue
- Operating profit declines 37% amid substantial legal costs
- AI investments push quarterly free cash flow negative
Meta Platforms (META) stock fell nearly 6% on Thursday, October 22, despite reporting $64.6 billion in third-quarter revenue, as investors focused on declining operating profitability and the growing cost of Mark Zuckerberg's artificial intelligence expansion.
Shares dropped approximately 5.7% during the session after initially rallying following Wednesday's earnings announcement. The reversal came as technology stocks weakened across Wall Street, with investors increasingly questioning whether AI investments can deliver sufficient returns.
The selloff contrasts with Meta's initial earnings reaction, when shares climbed in extended trading after the company exceeded revenue expectations and unveiled plans for a new share class.
Meta Revenue Climbs 26%, but Operating Profit Falls 37%
According to Meta's official earnings release, third-quarter revenue increased 26% year over year to $64.60 billion, exceeding Wall Street expectations of approximately $63.3 billion.
Advertising generated $63.06 billion, supported by a 10% increase in ad impressions and a 14% increase in average advertising prices. The company's family of apps reached 3.64 billion daily active users in September.
However, operating income declined 37% to $12.99 billion, while the operating margin narrowed from 40% to 20%.
A major contributor was a $9.89 billion charge associated with Meta's agreement with 52 U.S. state attorneys general over litigation involving social media and teenage mental health.
Excluding that charge, quarterly operating income would have reached approximately $22.88 billion, exceeding the previous year's result.
The figures show why the earnings reaction is more complicated than a simple profit decline. Much of the reported weakness came from litigation costs, but investors are also concerned about the company's underlying spending trajectory.
Meta's $145 Billion AI Spending Plan Pressures Cash Flow
Meta spent $34.91 billion on capital expenditures, including finance-lease principal payments, during the third quarter.
Its free cash flow fell to negative $2.12 billion, compared with positive $10.63 billion a year earlier.
The deterioration adds to concerns surrounding Meta's $145 billion investment plan, which includes data centers, AI chips, servers and other infrastructure.
Meta also raised the lower end of its 2026 capital expenditure guidance from $130 billion to $135 billion, while maintaining the $145 billion upper limit.
The widening gap between revenue growth and available cash reinforces the broader question of whether AI spending is paying off.
Similar concerns have emerged at Amazon, where expanding cloud infrastructure has weighed on cash generation despite accelerating demand.
Can Meta's AI Growth Reverse the Stock Decline?
Meta's AI investments are beginning to support advertising performance, while its Muse assistant has created additional opportunities in online shopping and automated services.
However, the company has not demonstrated that Muse's growing adoption can generate profits sufficient to justify its computing costs.
Zuckerberg has acknowledged that some newer AI products remain unprofitable, although Meta expects efficiency improvements and future commercial services to improve their economics.
Meta forecasts fourth-quarter revenue of $73 billion–$76 billion, indicating management expects continued strong growth.
The company is also exploring ways to monetize excess computing capacity, potentially creating additional revenue beyond advertising.
