Meta stock drops about 7% as AI spending turns free cash flow negative

What happened

Meta reported on Wednesday that third-quarter revenue climbed 26% from a year earlier to $64.60 billion, ahead of the roughly $63.37 billion analysts expected, according to CNBC. Finimize noted that the sales beat and an upbeat holiday-quarter outlook had initially calmed worries about AI costs. That calm did not last. On Thursday the stock slid around 7% as investors digested negative free cash flow of $2.12 billion, a full-year capex range lifted at the bottom to $135 billion to $145 billion, and plans for nonvoting Class C stock. The Financial Times (FT) reported that the Meta sell-off pulled US tech shares lower and that Treasuries rallied as traders sought safety.

What it means

Free cash flow is the money left after a company pays for its day-to-day operations and its investment in buildings and equipment. In the third quarter, Meta generated $32.79 billion of cash from operations but spent $34.91 billion on capital expenditures, including principal payments on finance leases. According to FXStreet and Capital Brief, it is the first time Meta has posted negative free cash flow since its 2012 stock market debut. A year earlier, the same quarter produced $10.6 billion of free cash flow, FXStreet said.

The bigger shock for some investors was the size of future commitments. Capital Brief and FXStreet reported that Meta disclosed about $825 billion of leases and contracts, largely for data centers and energy, stretching to 2036. FXStreet said that figure was up from $700 billion in July. Meta's own outlook says it will keep investing aggressively next year in both its core business and newer AI projects, and it concedes that spending through its MSL unit will take longer to pay back than investment in advertising.

Bond markets noticed too. The cost of insuring Meta's debt against default through five-year credit default swaps rose to the highest level since those contracts started trading, CNBC and Capital Brief reported. Long-term debt reached $80.92 billion at the end of September, up from $58.74 billion at the end of 2025, according to the company's results. Rising swap spreads do not signal imminent trouble for a company this profitable, but they show lenders want more compensation as borrowing and commitments grow.

The new Class C shares add another layer. Meta's board approved a listed class of stock with no votes, to be handed out as one new share for each existing Class A or Class B share, which the company says should work like a two-for-one split. Meta says the stock can be used to raise capital, pay employees and fund deals, while preserving founder Mark Zuckerberg's control. CNBC reported that the filing links the plan to a possible California wealth tax that could leave Zuckerberg with a multi-billion-dollar bill. Reported profit was also hit by a $9.89 billion legal charge tied to a settlement with state attorneys general over teen mental health; without it, Meta said earnings per share would have been $7.40 rather than $3.83.

The bull case

The core advertising machine is still growing fast: ad impressions rose 10% and average prices per ad 14%, and Meta guided fourth-quarter sales to $73 billion to $76 billion. Management says AI is already lifting ad revenue and expects strong growth through 2027, while Reality Labs losses are set to shrink. If that spending converts into new revenue, today's cash squeeze could look like a temporary investment phase.

The bear case

Spending is outrunning cash generation, debt is climbing and the company has signed up for hundreds of billions of dollars of long-dated commitments. A nonvoting share class designed partly for raising money raises the prospect of future dilution while keeping control concentrated. Legal risks around youth safety remain, with further trials scheduled, and Meta admits its newest AI bets will take longer to earn a return.