Meta shares slide 7% as AI spending push drives capex higher, free cash flow turns negative

Meta expects full-year capital expenditure (capex) of $135 billion to $145 billion, raising the lower end of its earlier forecast from $130 billion while retaining the upper limit. The higher spending outlook has raised questions about how quickly the company can convert its AI investments into sustainable cash flows and earnings growth.

Why is Meta increasing AI spending?

Meta has been investing heavily in computing infrastructure, data centres and other resources needed to develop and deploy AI models and services. The company is positioning AI as a key driver of future growth across its advertising business, platforms and emerging technology initiatives.

However, the scale of planned investment is increasing pressure on near-term financial metrics. Meta reported negative free cash flow of $2.12 billion for the third quarter, indicating that capital expenditure and other cash requirements exceeded the cash generated after operating needs during the period.

Negative free cash flow does not necessarily signal financial distress, particularly for a company investing heavily for future growth. However, investors will look for evidence that the spending improves advertising performance, user engagement, operating efficiency and monetisation over time.

Credit concerns rise as investors assess spending plans

The spread on Meta's five-year credit default swaps reportedly reached a record high on Thursday. Credit default swaps are financial contracts used to hedge against, or take exposure to, the risk of a borrower defaulting. Wider spreads generally indicate that investors are demanding greater compensation for taking credit risk.

The increase suggests that some investors are becoming more cautious about the financial implications of Meta's expanding investment programme. It does not, by itself, mean that the company faces an imminent default risk.

Meta also disclosed plans to create a new class of nonvoting Class C common stock, saying the move would help preserve its founder-led structure and provide flexibility to finance growth. Its regulatory filing also discussed the potential implications of a proposed California wealth tax for Chief Executive Mark Zuckerberg, including a possible multi-billion-dollar tax liability tied to his stock ownership.

Revenue grows, but investors focus on returns

Meta's third-quarter revenue increased 26% year-on-year to $64.60 billion, exceeding analysts' expectations of $63.37 billion. However, the earnings-per-share figure of $3.83 reported in the supplied account was not clearly comparable with the $5.75 forecast cited for the quarter.

The contrasting signals highlight the central question for investors: whether Meta's aggressive AI investment will generate returns sufficient to justify the rising costs.

For shareholders, the next key indicators will be capital expenditure trends, free cash flow, advertising growth and evidence that AI investments are improving profitability. Strong revenue growth remains encouraging, but the market reaction shows that investors are increasingly scrutinising the cost of sustaining Meta's AI ambitions.