Social media giant Meta (NASDAQ: META) released its second-quarter 2026 earnings report on July 29 after market close. Despite a top-line beat, the company’s stock plunged more than 10% in after-hours trading, driven by a sharp decline in profits, weaker-than-expected Q3 guidance, and persistently high AI-related capital expenditures.
Revenue Tops Estimates, but Margins Squeezed by Surging Costs
Meta reported second-quarter revenue of $60.801 billion, up 28% year-over-year and exceeding the analyst consensus of approximately $60.2 billion. The core advertising business remained the primary growth engine, generating $59.363 billion in revenue, a 27% increase from the prior year. Ad impressions rose 14% year-over-year, while the average price per ad increased 12%, signaling sustained strong demand on the platform.
Profitability, however, took a significant hit. Net income for the quarter came in at $15.848 billion, down 14% from $18.337 billion in the same period last year. Diluted earnings per share fell 13% to $6.18, well below market expectations of $7.18 to $7.22. The earnings decline was primarily driven by a sharp rise in costs—total costs and expenses surged 55% year-over-year to $42.026 billion, including $2.4 billion in legal-related charges and $1.18 billion in severance costs from layoffs in May. The operating margin narrowed sharply to 31%, down from 43% in the year-ago quarter.
Weak Guidance and Higher Capex Fuel Investor Anxiety
The market’s real concern centered on forward guidance. Meta expects third-quarter 2026 revenue in the range of $61.0 billion to $64.0 billion, with the midpoint of $62.5 billion falling short of the analyst consensus of $63.2 billion. The company also warned that foreign exchange headwinds would weigh on revenue growth by approximately one percentage point.
At the same time, Meta raised the lower end of its full-year 2026 capital expenditure guidance to $130 billion from $125 billion, while keeping the upper end at $145 billion. The relentless ramp-up in AI infrastructure investment continued to pressure cash flow—free cash flow for the quarter plunged to just $784 million, its lowest level in nearly four years, compared to $8.55 billion in the same quarter last year. The earnings release follows a similar episode last week, when Google parent Alphabet reported its first-ever negative free cash flow due to AI spending, triggering a stock sell-off. The parallel between the two tech giants suggests that Wall Street’s patience with the “AI burn rate” is wearing thin.
Cloud Computing Ambitions Could Offer Long-Term Upside
To allay investor concerns over the returns on its AI investments, Meta has recently signaled interest in exploring a cloud computing business. CEO Mark Zuckerberg previously stated that offering cloud services is “definitely on the table,” and the company has begun recruiting executives for this potential new line of business. However, the initiative remains in its very early stages and is unlikely to contribute meaningful revenue in the near term.
Bottom Line
Meta delivered a mixed earnings report—revenue beat expectations, but profits disappointed, guidance came in soft, and capex continued to climb. While the core advertising business remains resilient, the company faces a critical challenge in balancing its massive AI investments with sustained profitability—a question that investors will be watching closely in the quarters ahead.
