Meta's spending on AI is ramping, and investors want proof that the company can make serious money in areas other than advertising.
Meta Platforms' stock is under pressure Thursday as investors balk at the company's massive spending on artificial intelligence - coupled with uncertainty about what investments will look like next year.
Shares of the technology giant (META) were off 9.7% in morning trading Thursday, and Evercore ISI analyst Mark Mahaney noted that "a lack of forward clarity" for spending in 2027 is one factor weighing on the stock.
The tech giant just raised its capital-expenditure plans again for 2026, disclosing in its second-quarter earnings report that it now expects a range of $130 billion to $145 billion, whereas the prior low point of the guidance was $125 billion.
Meta CFO Susan Li said it expects to be "demand-constrained" for the foreseeable future, including in its core business, "where we still have numerous ROI-positive places that we would put compute toward if we had it." She was referring to return on investment.
Mahaney said investors are also reacting to little detail on how Meta's progress is going with its frontier AI models. He pointed to Meta CEO Mark Zuckerberg's comments that the company is "in the process of scaling much larger and more advanced models," which Mahaney said provide "only qualitative color."
Additionally, Meta's commentary on prioritizing selling AI over computing power is likely not sitting well with investors, Mahaney said. Heading into the results, investors had been excited about reports saying Meta could start building out an external cloud business similar to what Microsoft $(MSFT)$, Alphabet $(GOOG)$ $(GOOGL)$ and Amazon.com (AMZN) offer.
But Zuckerberg said on the earnings call that, while Meta is "getting a lot of offers for compute at a significant premium over what we paid for it," the company still thinks prioritizing the sale of its own AI offerings comes with a higher margin than selling compute access would. The company could move to serve large customers with compute access in the future, he said.
By sticking with its current route, Meta is putting off a nearer-term opportunity to grow revenue and free cash flow in a way that could offset some of its additional capex, according to Mahaney.
Meta reported free cash flow of $784 million in the second quarter, which was a steep decline from the $8.55 billion it posted a year prior.
Lastly, Mahaney said investors wanted to see proof of monetization in nonadvertising areas of the business. While the company's Meta Business Agents, which rolled out in the second quarter, now have more than 1 million monthly business users, Mahaney said it's too early to determine how the product will impact Meta's revenue. Personal agents, meanwhile, are still under development, he added.
Overall, the core business looks strong, Mahaney said, but with investments into AI moving higher, "the market wants non-core monetization proof points ... and isn't getting any."
MoffettNathanson analyst Michael Nathanson pointed to Meta's operating margins, which "continue to contract with no end in sight." He pinned that on higher depreciation and the cost of setting up Meta Superintelligence Labs, which was introduced last year.
Meta's operating margin was 31% for the second quarter, marking a 10-percentage-point drop from the 43% it reported a year ago. The company said the stark increase in its expenses for the quarter was tied to legal and severance costs, and operating income would have been up 9% without those charges.
"It is clear - and hardly a controversy - that Meta's use of AI on its core apps and advertising products are having meaningful benefits," Nathanson said in a note to clients.
However, he said, the focus should be on its return on invested capital as it "transitions from an asset-light to an asset-heavy model."
-Britney Nguyen