Meta profit drops 14% as AI spending and legal costs bite, shares slide up to 12%

Earnings miss

Meta's second-quarter revenue climbed 28% to $60.8 billion, but net income fell 14% to $15.85 billion. Adjusted earnings per share of $6.18 missed the $7.22 analyst consensus. The profit decline was driven by $2.4 billion in legal provisions and $1.2 billion in severance costs from layoffs carried out in May. Free cash flow collapsed to $784 million, down 91% from $8.55 billion a year earlier. The company also raised the lower end of its full-year expense outlook to $165–169 billion, incorporating the legal charges.

AI spending surge

Meta narrowed its 2026 capital expenditure forecast to $130–145 billion, lifting the floor from a prior $125 billion and nearly doubling the $72 billion spent in 2025. The company is building several gigawatt-scale data centers across the U.S., including a Louisiana site expected to expand to 5 GW of compute capacity with investment exceeding $50 billion. It also formed a venture for an El Paso, Texas, data center, 80% owned by BlackRock and valued at $14 billion. Media reports said Meta is in talks to lease computing power to Anthropic in a deal worth up to $10 billion over two years. CEO Mark Zuckerberg told analysts there is "not nearly enough supply" of computing power relative to demand and that Meta could sell excess capacity, with "quite a number of offers at a meaningful premium."

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Investor backlash

Shares fell as much as 12% in after-hours trading, contrasting with Microsoft's 8% gain on strong cloud results reported the same evening. The free cash flow collapse echoed Alphabet's first-ever negative free cash flow the prior week, intensifying fears of an AI spending bubble. Combined Big Tech AI capex is expected to top $700 billion this year, with Morgan Stanley forecasting over $1 trillion in 2027. Zuckerberg acknowledged the scale of the bet: "I get that this is sort of a big bet across the industry. My personal bet is that the people who invest in this are going to be rewarded and feel very good over time."

Advertising engine

Meta's core ad business generated $59.4 billion in revenue during the quarter. Social media advertising is forecast to rise 14% to $421 billion globally in 2026, benefiting from events including the Winter Olympics and FIFA World Cup. Monthly active users across Meta's family of apps reached 3.6 billion, up from 3.56 billion three months earlier. CFO Susan Li said every public Reels and Feed post on Instagram is now automatically processed through a large language model to improve ad targeting and recommendations.

Earlier this year, we reached a milestone of every public Reels and Feed post on Instagram being automatically processed through an LLM and analyzed across dimensions from topic to tone.

Legal and metaverse drag

Meta booked $2.4 billion in charges tied to legal proceedings, including lawsuits alleging its platforms addict young users. A California jury in March ordered Meta and Google to pay $6 million to a 20-year-old woman, a first-of-its-kind verdict that could influence thousands of similar pending cases. Meanwhile, the Reality Labs unit, the legacy of Zuckerberg's metaverse pivot, lost $4.62 billion in the quarter, pushing cumulative operating losses past $80 billion over roughly six years. Meta's AI models still lag behind those of Anthropic and OpenAI on most metrics, according to several reports, adding to investor unease about the return on the company's massive infrastructure outlay.