By Katie Paul and Jaspreet Singh

The Facebook and Instagram parent company reported free cash flow of $784 million in the second quarter ended June 30, down from $8.55 billion a year earlier, sending its shares down 10% in extended trading.

Metaâs cash flow wipeout echoed Alphabetâs, which last week reported its first-ever cash-flow-negative quarter, stunning even the most bullish of Wall Street investors who sold off the Google ownerâs stock.

Meta CEO Mark Zuckerberg said on an earnings call: âWe expect that a significant portion of our compute is going to go towards training our models, growing our core business and delivering personal agents and new products, but we also expect to grow a large business serving large customers as well.â

Facing repeated questions from analysts about the companyâs AI strategy and how he planned to capitalize on the enormous sums Meta is investing in the technology, Zuckerberg said the spending reflected its bet that personal AI agents would become a huge consumer business.

He argued the company was uniquely positioned to commercialize the technology at scale despite the near-term costs.

Metaâs free cash flow was the lowest since late 2022, when the company was facing similar investor scrutiny over spending on its ambitious metaverse bet. Its Reality Labs division has posted more than $80 billion in operating losses.

Microsoft reported a 23% drop in free cash flow in the June quarter from a year earlier, but any concerns about its pace of spending were alleviated by surging growth in its high-margin cloud business. The software giantâs shares rose 4.4% in aftermarket trading on Wednesday.

FEVERISH SPENDING

The feverish spending on AI infrastructure comes as Meta, which continues to be an almost entirely advertising-driven business, attempts to diversify its revenue sources.

The company reported second-quarter earnings per share of $6.18, missing analystsâ average estimate of $7.22, according to data compiled by LSEG.

âMetaâs AI spend was easier to celebrate when margins were expanding. Itâs harder to celebrate now that the costs are showing up in the numbers,â said Mike Proulx, a senior executive at research firm Forrester. âMeta isnât spending billions on AI infrastructure just to make Facebook and Instagram better. The company believes AI can create entirely new businesses.â

Meta expects to spend as much as $145 billion on AI infrastructure this âyear, about double last yearâs investment, and a significant portion of Big Techâs more than $700 billion projected outlay on the technology in 2026.

Reuters reported this month that Meta plans to double overall computing power to 7 gigawatts this year and to double it again, to 14 gigawatts, next year. It currently has 32 data centers across the globe in operation or under construction.

The company raised the lower end of its capital expenditure outlook on Wednesday. It now expects 2026 capital expenditure to be between $130 billion and $145 billion, compared with its prior forecast of $125 billion to $145 billion. At the beginning of the year it had forecast spending between $115 billion and $135 billion.

One bright spot in the results was Metaâs revenue, which jumped 28% to $60.8 billion in the second quarter, the quickest pace of growth since the fourth quarter of 2021, barring the first quarter of 2026. Usage of Metaâs apps rebounded after a quarterly dip in April. The company reported 3.6 billion daily active people, a 3% rise year-over-year.

Luke Stillman, a managing director at research firm Madison and Wall, said: âMetaâs underlying ad business thatâs financing everything though is still performing well and is our main focus.â

METAâS LEGAL TROUBLES

While investors are scrutinizing Metaâs AI spending, it faces legal risks related to its core business. The company said in a court filing this month that four states were seeking $1.4 trillion in penalties over accusations it designed its Facebook âand Instagram platforms to addict young users and misled the public about their safety.

Meta warned in April that legal and regulatory blowback in the European Union and the U.S. over youth social media issues âcould significantly impactâ its business and financial results.

The company said on Wednesday that it continued to see this scrutiny.

It also had severance expenses associated with a sweeping restructuring it has been carrying out to reorient its inner workings around AI. In May, it laid off about 10% of its workforce, or around 8,000 employees, as part of that overhaul.

On the earnings call, Meta Chief Financial Officer Susan Li said second-quarter operating income would have increased 9% year over year without the companyâs legal charges and severance expenses. Operating income actually fell 8%.

âWe 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,â she said in the companyâs earnings statement.

Meta shares slide after results https://fingfx.thomsonreuters.com/gfx/mkt/movazbnxbpa/MEta.png

(Reporting by Katie Paul in New York and Jaspreet Singh in Bengaluru; Editing by Nia Williams, Sayantani Ghosh and Jamie Freed)