Meta Beats on Revenue as AI Spending Turns Cash Negative

Meta grew revenue 26% to $64.6 billion and guided above forecasts, yet a $9.9 billion legal charge, negative free cash flow and a non-voting share class reframe the investment case.

Key Takeaways

• Price per ad rose 14% and impressions 10%, lifting advertising revenue 26% to $63.1 billion and pushing total sales past the top of Meta’s own $61 billion to $64 billion guidance.
• Capital spending of $34.9 billion outran $32.8 billion of operating cash flow, while long-term debt climbed to $80.9 billion, nearly matching Meta’s $82.4 billion of cash and securities.
• A new non-voting Class C stock, effective January 2027, gives Meta fresh currency for capital, pay and deals while tying Zuckerberg’s share sales to his voting stake and tenure.

The Charge That Hid a Strong Quarter

Meta Platforms reported two quarters on October 21, and investors had to decide which one to believe. The first was an advertising business of rare strength. Revenue reached $64.6 billion, up 26% from a year earlier, above the $61 billion to $64 billion range management set in July and ahead of the $63.37 billion consensus compiled by LSEG. The second was a company whose operating income fell 37% to $13 billion and whose margin halved to 20%. The gap between them was a $9.89 billion charge, booked in general and administrative expenses, for Meta’s August agreement with 52 state attorneys general over teen mental health litigation. That settlement provides for payments of up to about $18.59 billion.

Remove the charge, as Meta does in its own reconciliation, and operating income rises to $22.88 billion. That is about 11% higher than a year ago, at a margin near 35%, and diluted earnings per share would have been $7.40 rather than the reported $3.83. The jump in net income to $9.86 billion from $2.71 billion means less than it seems, because the year-earlier quarter absorbed $19.87 billion of deferred income taxes and an 87% effective tax rate. The more revealing comparison sits higher up the income statement. Excluding the settlement, total expenses rose about 36%, ten points faster than revenue. Meta’s earnings are still growing, but the company has entered a period in which costs outpace sales by design.

Advertisers Are Paying for Precision

The mix behind advertising revenue, up 26% to $63.06 billion, explains why investors remain willing to fund that design. Ad impressions grew 10% and the average price per ad rose 14%. More than half the growth therefore came from advertisers paying more for each placement, which happens when the placements perform better. Chief Financial Officer Susan Li credited AI models across the ad system. She cited a generative recommender that lifted Facebook Feed conversions by nearly 2% and the GEM ranking model, which improved app ad conversions by 9.6%. Nearly 10 million advertisers used Meta’s generative AI creative tools during the quarter. The AI program Meta is asked to justify is already built into the auction that pays for it.

The audience has little room left to grow. Family daily active people averaged 3.64 billion in September, up 3%, so engagement and pricing are now the main levers. Mark Zuckerberg said time spent per user on Threads rose more than 20%. He also said the service has overtaken X in monthly actives, a figure Meta does not report in its financial statements. The more durable signal may be other revenue, which rose 59% to $1.1 billion on the strength of WhatsApp paid messaging and subscriptions. The sum is modest next to the advertising business. Even so, it is the first credible sign of a Meta that earns money from transactions and subscriptions as well as from attention.

Muse Puts a Product Behind the Spending

For most of the past year, Meta’s AI investment was a thesis without a consumer product. Muse provides one. Meta introduced the personal AI agent on September 8, and within about six weeks more than 10 million people in the United States and Canada had set it up, Zuckerberg said, with shopping already the leading use. On October 12 the company released Muse Wonder and Muse Wonder Full. Meta calls them its most capable models to date, and Zuckerberg called Muse Wonder “our first frontier model.” Muse arrives on Meta’s glasses next month. That gives Reality Labs, long the most questioned line in the accounts, a clearer purpose as the hardware for an AI service.

Whether the economics will follow adoption is still unknown. Zuckerberg said Muse is costly to serve, which is why it has not launched beyond North America. He signaled that Meta would monetize “somewhat sooner on this than our normal playbook.” Li expects AI businesses to add incremental revenue in 2027 and to become “a meaningful source of revenue diversification over time.” There is little engagement data so far. Days before the results, analysts at Morgan Stanley, which also advised Meta on its new share structure, estimated Muse’s 14-day retention at roughly 20%. Sign-ups measure curiosity, while retention measures habit, and habit is what Meta has always monetized.

A Thinner Cushion and a New Share Class

The quarter’s most telling number was a small negative one. Capital expenditures, including finance lease principal, reached $34.91 billion against operating cash flow of $32.79 billion. That left free cash flow at negative $2.12 billion, compared with a positive $10.63 billion a year earlier. Meta narrowed its 2026 capital spending range to $135 billion to $145 billion. That is close to double the $72.2 billion it spent in 2025 and well above the $115 billion to $135 billion it projected in January. The balance sheet has covered the shortfall. Long-term debt reached $80.92 billion at September 30, up from $58.74 billion at the end of 2025, against cash and marketable securities of $82.45 billion. Meta has bought back no stock this year, after repurchasing $26.25 billion in the first nine months of 2025.

Seen this way, the board’s creation of a publicly listed, non-voting Class C common stock is as much a financing decision as a governance one. Each Class A and Class B share will receive one Class C share once the amended charter takes effect on January 19, 2027, and Meta expects this to work like a two-for-one split. The company lists raising capital, employee compensation and acquisitions among the uses. A Founder Alignment Agreement filed with the SEC bars Zuckerberg from selling 80% of his Class C shares without selling matching voting shares. Those shares are released at 2.5% a quarter over eight years while he remains in leadership, and he commits to remain a California resident. The board will also declare further one-for-one Class C dividends each time the stock doubles from a September 10 reference price of $580.60, provided annualized returns reach at least 10%. Google created a non-voting share class in 2014. Meta’s version ties its founder’s ability to sell far more tightly to his tenure and the stock’s performance.

Investors Back the Plan, With Conditions

The market sided with the stronger of the two quarters. Meta shares closed at $697.52 on October 21, after falling roughly 10% from their mid-October high, and rose about 5% in extended trading. The fourth-quarter revenue outlook of $73 billion to $76 billion implies growth of roughly 22% to 27% over the $59.89 billion reported a year earlier, and it sits above the $73.73 billion consensus. “The market has shifted from punishing Meta for spending to rewarding it for having a compelling product story,” said Jesse Cohen, senior analyst at Investing.com. Meta raised its full-year expense outlook to $175 billion to $179 billion, mostly to absorb the settlement. It expects Reality Labs losses to narrow to about $15 billion in 2027, from $18 billion to $19 billion this year.

The legal exposure keeps growing. On the day Meta reported, a New Mexico state judge ordered the company to pay $25 billion under the state’s Unfair Practices Act, after a jury found it had misled users about data privacy and policy enforcement. The ruling came after the third quarter closed, so it is not in these results, and the state’s attorney general said he expects an appeal. Meta has warned of more youth-related trials in the United States in the coming months. It also gave no 2027 budget, saying only that it will keep investing aggressively and lay out its plans on the fourth-quarter call. The offer to shareholders is now unusually plain: an advertising business strong enough to fund an AI buildout, a product that hints at where the buildout leads, and a share structure that leaves one person to decide how far it goes.