Meta’s AI Boom Runs on Debt and New Shares

Meta raised the lower end of its 2026 capital-spending forecast to $135 billion on Wednesday, Oct. 21, and reported negative free cash flow of $2.12 billion for the third quarter. It expects to spend $135 billion to $145 billion this year on data centers, advanced chips and computing power as it competes with OpenAI and Anthropic.

Who Funds the Expansion

Meta spent $34.91 billion on capital expenditures in the third quarter, up from $31.08 billion in the second quarter. Analysts expected annual spending of $139.79 billion. On the “Cheeky Pint” podcast earlier in October, CEO Mark Zuckerberg said he’d been willing to bet up to $200 billion on AI before he knew the models would work.

That spending is weighing on cash flow. Meta reported negative free cash flow of $2.12 billion for the third quarter, compared with positive $10.63 billion a year earlier. Long-term debt totaled $80.9 billion last quarter, up from $58.7 billion a year earlier.

Some financing doesn’t show up on Meta’s balance sheet. The company worked with private-credit firms to finance a $50 billion data-center deal in Louisiana.

Meta said it will issue a new class of non-voting Class C common stock in January 2027. The shares, the company said, would give it more ways to raise financing, fund acquisitions and retain talent while maintaining Zuckerberg’s control. The New York Times also reported the stock could be used for employee compensation. The arrangement effectively creates a two-for-one stock split: it divides individual shares, increases the number available to buy and sell, and lowers the share price.

Revenue, Costs and Legal Payments

Meta reported third-quarter revenue of $64.60 billion, up 26% from a year earlier and above Wall Street estimates of $63.37 billion, according to LSEG data. It forecast fourth-quarter revenue of $73 billion to $76 billion, topping estimates of $73.73 billion.

Costs and expenses climbed 68% from a year earlier to $51.61 billion. Profit came to $9.8 billion, compared with $2.7 billion a year earlier, when a tax charge affected results. Meta reported diluted earnings per share of $3.83; without a $9.89 billion charge tied to a child-safety settlement, it would have been $7.40. The Verge reported operating income would have reached $22.89 billion without that charge.

In August, Meta agreed to pay to settle claims by nearly all U.S. states that its platforms were designed to addict children. The Verge put the settlement amount at $17.1 billion, with Meta paying $5.3 billion if YouTube and TikTok implement stricter settings and safeguards for children, a step Meta also agreed to take. Reuters described the deal as as much as $18 billion over a decade and said it included restrictions on teenagers’ use of Facebook and Instagram. The agreement removed a regulatory hurdle and let Meta avoid a potentially lengthy trial that could have exposed more internal documents about its treatment of young users.

A New Mexico judge ordered Meta to pay $25 billion on Wednesday after a jury found the company misled state residents about sharing user data with third parties and enforcing policies on hate speech and misinformation. The case related to British political consulting firm Cambridge Analytica. Emarketer senior analyst Minda Smiley called the penalty a “stark reminder of the current legal challenges Meta faces, which will continue into next year.” She said privacy and safety concerns “will only ramp up should AI agents become more mainstream,” potentially hurting Meta given its reputation in that area.

The Business Model Behind the Agents

Meta’s consumer-focused AI agent Muse had more than 2 million daily users and 3 million downloads, according to Business Insider. The New York Times reported it became the fastest-growing AI app since OpenAI’s ChatGPT in 2022. Some users told Business Insider they used Muse to plan trips and prepare for exams.

At Meta’s Connect keynote in September, Zuckerberg said Muse “has a novel business model.” He added: “We believe that Muse will make you money, and we’re standing behind this by making Muse free for a huge number of tokens with the expectation that over time, we will profit by taking a small fee from transactions.”

Meta CEO Zuckerberg said in a statement, “Our investments are paying off, the core business is strong, and we’re seeing velocity across the board.” Chief financial officer Susan Li said the company was still developing its budget and capacity plans for next year, but expected to “continue investing aggressively” in its core business and emerging AI initiatives.

Investors’ response has changed with the spending outlook. Meta shares rose more than 4% in extended trading, according to Reuters. The stock fell almost 10% last quarter after earnings per share missed estimates and fell 6% the quarter before after higher capital-spending guidance. Market commentary described investors as anxious about debt issued by major AI companies and strain in funding structures at CoreWeave and other riskier parts of the AI boom.

Gartner forecasts worldwide information-technology spending will rise 15% next year to $7.3 trillion in 2027, from a forecast $6.39 trillion this year. Data-center systems spending is expected to grow 55%, while infrastructure as a service is forecast to grow 26% to $367 billion. “We have the demand for AI-optimized servers going crazy. We have the supply not being able to keep up. We have AI servers doubling in price, and nobody’s slowing down on orders,” John-David Lovelock, distinguished VP analyst at Gartner, told the WSJ Leadership Institute.