Meta shares rose about 5% in after-hours trading on Wednesday, as the tech company delivered strong growth and said its AI investments were paying off.
Meta’s core advertising business delivered a strong quarter, with the company reporting a 26% increase in total revenue to $64.6 billion, helped by AI recommendations, more ads being shown and rising ad prices.
And investors are eyeing promising new businesses around Muse, the personal artificial intelligence agent the company launched in September. CEO Mark Zuckerberg said Meta’s Muse agent could eventually generate more revenue per user than apps like Instagram and Facebook.
According to Zuckerberg, the future Muse business model is expected to include subscriptions, ads, e-commerce tools and other features. Zuckerberg added that more than 10 million people in the US and Canada have set up accounts for Muse.
"The launch of Muse, Meta's AI model, aims to fuel that next growth development and early signs look promising," Ben Barringer, head of technology research at Quilter Cheviot, said.
The 10 million Muse users, with much of the activity focused on shopping and travel, spend an average of around $200 per purchase through the agent. "Meta wants to scale this to one billion users globally and get to profitability quicker than the company would usually do, underscoring their confidence in Muse and its capabilities," added Barringer.
The CEO noted that Muse requires significant computing power to run, but that the company expects to improve its cost efficiency by more than 10 times in the next year, "which will enable it to be profitable once the revenue lines are at scale."
The parent company of Facebook and Instagram reported net income of $9.86 billion, or $3.83 per share, for the July-September period. That's up from a profit of $2.71 billion, or $1.05 per share, in the same period a year earlier, when earnings were hit by a large one-off tax charge.
"We hit major milestones this quarter toward delivering personal superintelligence for everyone — including launching Muse and Muse Wonder, our first frontier model," said CEO Mark Zuckerberg in a statement. "Our investments are paying off, the core business is strong, and we're seeing velocity across the board."
Meta said the number of daily active people using its "family of apps" — Facebook, Messenger, Instagram and WhatsApp — grew 3% from a year earlier to an average of 3.64 billion in September.
However, Meta’s quarterly free cash flow turned negative for the first time since 2012 due to intense spending on artificial intelligence.
The company has been spending aggressively to build out its artificial intelligence (AI) capabilities, and investors are looking for signs that the investments are paying off.
Meta raised the lower end of its estimate for 2026 capital expenditures and now anticipates spending will range from $135 billion to $145 billion, compared with an earlier estimate of $130 billion to $145 billion.
The firm didn't provide an estimate for spending next year but noted that it expects to continue investing aggressively to support its core and AI businesses.
For the current quarter, Meta is forecasting revenue in the range of $73 billion to $76 billion, the midpoint of which is higher than the $73.65 billion analysts are expecting.
"All in all, though, Meta's core business remains strong, and with Muse being scaled up at pace, you can see a solid runway for future growth too," Barringer said.
Legal costs take a bite from earnings
Meta reported its earnings just hours after another financial penalty was announced in a case in New Mexico.
A judge ruled that Meta must pay $25 billion to New Mexico after a jury found last month that the social media giant had deceived users about data privacy in a case related to the Cambridge Analytica scandal.
"We continue to monitor active legal and regulatory matters that could significantly impact our business and financial results," CFO Susan Li said on a call with analysts.
Meta still faces "a number of youth-related trials scheduled in the coming months in the United States," Li continued.
Meta’s third-quarter profits took a hit from a settlement worth up to $18.59 billion over social media’s effects on teen mental health.
In August, Meta reached the settlement with 48 US states and agreed to take steps to keep children under 13 off Instagram and Facebook and teens aged 13 to 17 in age-appropriate accounts.
Excluding the impact of a $9.89 billion charge related to this agreement, the company's third-quarter earnings would have been $7.40 per share, Meta said.
New shares could help fund Zuckerberg's billionaire tax bill
Also Wednesday, Meta announced that its board had approved the creation of a new class of publicly listed, nonvoting Class C common stock, effective in January. The move is intended in part to boost the company's ability to raise capital for AI infrastructure investments.
"Meta plans to issue nonvoting shares to fund AI investments without diluting CEO Mark Zuckerberg's control," said Andrew Rocco, stock strategist at Zacks Investment Research.
"It mirrors what Google has done too, as the hyperscalers look for various streams of investment to help fund their capex plans," Barringer said.
The new share structure could also help keep the founder and chief executive in California.
In a securities filing, Meta said Zuckerberg's voting power "could drop to approximately 53 percent or lower" if he has to sell a significant portion of his voting shares to pay increased taxes.
That is a possibility due to a controversial tax on billionaire wealth, Proposition 40, that California voters will decide on in November.
Existing shareholders will be given one new Class C share for every Class A or Class B share they already own — meaning Zuckerberg will also receive nonvoting shares and could eventually sell them to pay the new tax without diluting his voting power.