Massive AI investment sparks concerns: Meta (META.US) free cash flow plunges by 94%, but some Wall Street institutions remain optimistic about the long-term outlook

According to Zhitong Finance APP, Meta Platforms (META.US) revealed in its latest quarterly earnings that the AI race has led to soaring costs. With capital expenditures continuing to climb, free cash flow and profitability are under significant pressure. Meanwhile, management failed to provide the market with a clear expectation for when returns on AI investments will materialize, resulting in a sell-off of the company's shares. As of press time, the stock had fallen over 9%, trading at $532.7.

Meta indicated that with the lower end of capital expenditure guidance being raised by another $5 billion, AI investments will continue to weigh on free cash flow and profitability. Data shows the company's free cash flow for the quarter was only $784 million, a sharp drop of about 94% from the previous quarter's $12.4 billion, becoming a focal point for the market.

Wedbush analyst Ygal Arounian commented on Meta's earnings call that although the company is advancing various strategies that could enhance the commercialization of AI, it is still in the very early stages, with a long way to go before achieving large-scale monetization.

Meta CEO Mark Zuckerberg stated that the additional computing power the company possesses is worth more than its construction cost, but the real opportunities to commercialize this computational power are not expected to appear until 2027. However, Wall Street does not fully agree with this view, and investors are concerned that with hundreds of billions of dollars expected to be continuously invested in AI over the next few years, free cash flow will continue to be squeezed.

In addition to profitability pressure, Meta's expanding AI strategy has also raised concerns about resource allocation in the market. The company is currently advancing multiple projects simultaneously, including artificial intelligence, large models, smart glasses, self-developed chips, AI business agents, and data center construction. Some analysts believe this could lead to resources being too spread out among management and R&D teams.

Needham analyst Laura Martin said that Meta is "fighting too many battles at the same time," with different businesses corresponding to different products, clients, sales systems, and competitive advantages. She believes the company continues to expand into new areas rather than concentrating resources on the core businesses with the highest returns, and such strategic dispersion reduces the probability for Meta to succeed in its various goals.

Nevertheless, many Wall Street firms remain optimistic about Meta’s long-term outlook.

Evercore analyst Mark Mahaney reiterated his "outperform" rating on Meta, seeing the current stock price as attractive. He pointed out that the market's current focus is no longer on Meta’s core advertising business, but on whether the company can leverage AI to create new products, services, and commercialization models. He believes the probability of achieving this goal is higher than the market’s expectations reflected by the current approximately 16x P/E ratio, and that the low valuation is mainly due to management's failure to provide a clear enough roadmap for AI monetization during the earnings call.

Mahaney noted that Meta’s core business performance remains strong, but due to the massive scale of this round of AI investments, the market hopes to see more substantial evidence of AI monetization beyond its advertising business, which this earnings report has yet to provide.

Morgan Stanley analyst Brian Nowak also maintained an "overweight" rating on Meta. He noted that Meta’s Apps now have 3.6 billion daily active users, while Instagram has surpassed 2 billion daily active users. The core business still boasts massive scale, user stickiness, and strong commercialization moats. As Meta uses large language models to analyze vast amounts of data more deeply, its advertising effectiveness and monetization capabilities are expected to further improve, continuing to provide sufficient cash flow to support AI investments.

Citi Research also maintained a “buy” rating on Meta. Analyst Ronald Josey said that although Q2 revenue and Q3 guidance were basically in line with market expectations and the company continues to increase AI investment, there is potential to create more commercialization tools in the future. He also acknowledged that rising capital expenditures, the timeline for realizing AI returns, and profitability will remain focal points of market debate.

Overall, despite increased capital expenditures, rising legal and layoff costs, and free cash flow pressure creating short-term concerns, mainstream Wall Street institutions still generally maintain their “buy,” “outperform,” or “overweight” ratings for Meta.