Meta Platforms shares are down about 16% year to date as investors weigh the near-term cost of its expanding AI infrastructure buildout. CEO Mark Zuckerberg is holding firm on the spending even after free cash flow fell 18% year over year, betting that stronger ad performance and outside demand for the company's compute capacity will pay off.
Meta Platforms shares have dropped about 16% year to date as investors focus on the near-term cost of the company's accelerating AI infrastructure spending. Free cash flow over the trailing 12 months fell 18% year over year, yet Zuckerberg isn't backing off the buildout.
The company continues investing heavily in infrastructure to keep up with rising AI use across its products and businesses, Zuckerberg said. The stock trades at roughly 18 times forward earnings estimates. That valuation looks attractive if the spending starts converting into stronger ad pricing and user engagement.
Ad revenue and engagement keep climbing
Meta's core ad business is humming. Revenue from its family of apps climbed 27% year over year to $59 billion in the second quarter. The global average price per ad rose 12%, a sign that AI tools are strengthening advertiser performance.
Engagement moved the same direction. Instagram logged double-digit growth in time spent on the app. Time spent on Facebook rose 9% worldwide. Daily interactions with Meta AI jumped 60% after the assistant's Muse Spark model integration.
Capital spending nearly wipes out cash flow
Capital expenditures hit $30 billion in the second quarter. That capex nearly wiped out free cash flow, which totaled just $1.7 billion for the quarter. Management's full-year guidance calls for capex of $130 billion to $145 billion.
Data centers and chips seem to keep getting more expensive. But CFO Susan Li credited the industry's historic under-building for the wave of AI adoption with making existing capacity, including Meta's own, extremely valuable.
Outside compute demand could offset the cost
Through its Meta Compute initiative, the company is building a one-gigawatt data center with BlackRock to train internal models, support ad growth, and power personalized agents and new products. Zuckerberg said Meta is already seeing strong interest from other businesses in using its compute, at prices well above the company's own cost.
If Meta converts that outside interest into revenue on top of its ad engine, the market may be underestimating the company's long-term earnings from the buildout.
Source: Fool
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