Meta's stock slid 5% after hours following its Q2 earnings report that showed strong revenue growth but a sharper-than-expected decline in profits, alongside a boost to its 2026 capital expenditure outlook. The revised outlook signals heavier investments that are already pressuring margins and free cash flow.

Revenue Up, Profits Down as Costs Surge

The company posted $60.8 billion in revenue for the quarter, a 28% increase from last year, slightly beating Wall Street's $60.2 billion estimate. However, diluted earnings per share sank 13% to $6.18, missing the $7.19 expected by analysts. Net income fell 14% to $15.8 billion, while operating income declined by 8% to $18.8 billion.

Meta's total expenses jumped 55% to $42 billion, including a hefty $2.4 billion in legal charges and $1.18 billion related to May's workforce reductions. The operating margin compressed to 31%, down from 43% last year, largely due to increased spending on AI infrastructure and other growth initiatives.

Capital Spending Soars and Free Cash Flow Slumps

Capital expenditures nearly doubled year-over-year to $31.08 billion this quarter. Meta pushed the lower bound of its 2026 capex forecast up to $130 billion from $125 billion, with the upper limit unchanged at $145 billion. This elevated spending weighed heavily on cash generation: operating cash flow was $31.9 billion but free cash flow plummeted to just $784 million, compared to $8.55 billion a year ago.

CEO Mark Zuckerberg emphasized that artificial intelligence is already fueling growth in Meta's core advertising business while laying the groundwork for new products and enterprise services. Advertising remains strong with ad impressions rising 14% and average price per ad increasing 12% year-over-year, supporting the platform’s 3% growth in daily active users reaching 3.6 billion.

Meta’s Family of Apps division pulled in $60.37 billion in revenue and $23.39 billion in operating income, illustrating resilience despite cost pressures. However, mounting AI expenses and capex are turning investor focus toward when these investments will yield stronger profit margins. This echoes recent concerns reflected in Meta's 9% stock drop earlier this year as AI costs outpaced revenue increases.

This material is for informational purposes only and does not constitute financial advice.