Meta’s Earnings Show Why Wall Street Is Losing Patience With AI Spending

Key Points

• Meta’s second-quarter revenue beat expectations, but legal charges, severance costs and AI infrastructure spending weighed on reported earnings.
• The company raised the low end of its 2026 capital expenditure outlook, keeping investor attention on the timing of AI returns.
• Meta’s ad business remains strong, but investors are still waiting for clearer evidence that AI can create meaningful non-advertising revenue streams.

A week after Alphabet NASDAQ: GOOG reported earnings, it was Meta Platforms' NASDAQ: META turn to provide the latest financial litmus test among AI hyperscalers.

Unfortunately for Meta, the stock suffered a similar post-earnings fate as Alphabet. Shares dropped approximately 6% in after-hours trading, not far off from the roughly 7% decline Alphabet saw.

Meta disappointed on multiple fronts, some quantitative and others qualitative. However, some of these factors are not as negative as they may initially seem. Investors are still waiting for Meta to translate its massive AI spending into the massive non-advertising opportunities the company sees. Patience remains a key factor in realizing significant potential gains in Meta stock going forward.

Legal Charges Drive the Earnings Miss

Meta’s revenue came in at $60.80 billion in Q2, an increase of 28% year-over-year (YOY). This was solidly above estimates of $60.22 billion. Ad impressions delivered rose 14% YOY, a notable deceleration versus 19% in Q1, while price paid per ad growth remained strong at 12%. However, the first real area where Meta ran into trouble was on earnings per share (EPS). EPS was $6.18, dropping about 13% YOY. This compares to analyst estimates of $7.13, which implied growth of near 0%.

Still, the miss is not as drastic as it appears when adjusting for certain expenses. Meta noted that it faced $2.40 billion in legal charges, as well as $1.18 billion in severance expense charges. This was a result of youth-related legal issues and the company’s recent layoffs, which affected around 8,000 employees. Looking beyond these expenses, Meta’s operating income would have been $22.35 billion, a roughly 9% increase rather than the 8% decline it reported. Holding its interest expenses, tax rate and share count constant would result in EPS of around $7.30, solidly exceeding estimates.

Because the company’s headcount reduction should result in lower expenses over time, it is fair not to hold the $1.18 billion against it. However, as a social media business with a massive reach, large occasional legal expenses are a real risk.

Overall, it is positive that Meta exceeded EPS expectations from a purely operational standpoint. However, investors should not forget the fact that legal issues can significantly hurt Meta’s reported profitability. As Meta notes, “we continue to see scrutiny on youth-related issues in several markets and have a number of youth-related trials scheduled for this year in the U.S., which may ultimately result in a material loss."

Meta Misses on Q3 Guidance, Provides Little Detail on Non-Ad Opportunities

Another disappointing aspect of Meta’s report was its Q3 revenue guidance. The company expects sales of $61 billion to $64 billion, or $62.5 billion at the midpoint. This midpoint was moderately below the $63.2 billion that analysts expected. However, it is worth noting that the company’s guidance range still extends beyond $63.2 billion at the upper end.

Meta also raised its capital expenditure guidance (CapEx), although the increase was small. The company expects to spend between $130 billion and $145 billion on CapEx in 2026, or $137.5 billion at the midpoint. That is up from its prior range of $125 billion to $145 billion, with a midpoint of $135 billion, implying a roughly 1.9% increase. However, when combined with a reported EPS miss and Q3 revenue guidance miss, even a slight CapEx increase is not what markets want to see.

Meta also didn’t share many specifics regarding its more forward-looking opportunities, such as cloud or Muse Spark 1.1 adoption. On cloud, the company said that it sees a “large enterprise opportunity” in “potentially selling compute directly," framing it as a possibility rather than a decided move. Meta added, “We're getting a lot of offers for compute at a significant premium over what we paid for it." Cloud was one of several large enterprise opportunities that Meta outlined.

Others included its Application Programming Interface (API), which is how it plans to monetize its models, like Muse Spark 1.1. Notably, the company said the number of people interacting with the Meta AI assistant each day has risen 60% since it rebuilt Meta AI and integrated Muse Spark. This indicates that the model is making Meta AI significantly more useful. The other enterprise opportunity is business agents.

Meta also said it was “developing new personal agents that will be the foundation for our next wave of products and revenue lines in the months and years ahead.” However, regarding future products and revenue streams, CEO Mark Zuckerberg’s line “we'll have more to share on all of this soon” sums up the call.

As Investors Wait, Meta’s Free Cash Flow Falls Below $1 Billion

Meta is growing at a strong pace, but the company’s non-advertising AI revenue generation continues to be a wait-and-see game. The Muse Spark 1.1 API, Cloud, and the various agents Meta is developing are the main non-advertising opportunities to watch going forward. In the meantime, Meta’s free cash flow dropped to just $784 million as it continues to spend billions on AI infrastructure to realize these opportunities.

Meta isn’t alone in sending its free cash flow to historically low levels; Alphabet’s free cash flow came in at -$5.9 billion in Q2. These are reminders that hyperscalers will continue to spend big on AI, even if the market may not be rewarding them at this point.