Meta Stock Under Pressure Despite Revenue Beat: The Details

Meta’s stock price (NASDAQ:META) is under pressure in the pre-market session, dropping 8.64% to $535, after second-quarter earnings revealed that soaring AI infrastructure costs and a hefty legal charge more than offset strong revenue growth, reigniting concerns about the return on the company’s massive capital deployment.

Meta shares fell sharply following the after-hours release, with the stock down 7.5% as markets digested a mixed earnings picture that has only worsened heading towards the open. While the company delivered its fourth consecutive quarter of revenue growth above 20%, the combination of declining profitability, elevated spending, and cautious forward guidance proved too much for a stock that had been priced for AI-driven operating leverage.

Revenue Growth Masks Profit Pressure

Meta reported second-quarter revenue of $60.8 billion, up 28% year-over-year and narrowly ahead of the $60.17 billion analyst consensus.

Advertising revenue, which accounts for nearly all of the company’s top line, rose 27% to $59.4 billion, driven by a 14% increase in ad impressions and a 12% gain in average price per ad. The dual drivers of volume and pricing growth underscore the continued strength of Meta’s core business and suggest that AI-powered targeting and recommendation systems are delivering tangible improvements in advertiser return on investment.

Yet the revenue beat was overshadowed by a sharp deterioration in profitability metrics.

Earnings per share came in at $6.18, down 13% from the prior year and missing estimates of $7.22 by 14%. Operating income fell 8% to $18.8 billion, well short of the $21.5 billion consensus. The company attributed much of the shortfall to a $2.4 billion charge related to legal proceedings, along with higher baseline operating expenses tied to infrastructure expansion and workforce investments.

Capex Guidance Creeps Higher, Again

Perhaps more concerning to markets was Meta’s decision to raise the lower bound of its full-year 2026 capital expenditure guidance to $130 billion, up from the previous range of $125 billion to $145 billion.

The company also lifted the low end of its operating expense outlook, signaling that the cost structure is expanding faster than many had hoped. Actual second-quarter capex came in at $31.08 billion, below the $33.7 billion estimate, but the upward revision to future spending reinforced a narrative that has dogged the stock since April: that Meta’s AI infrastructure buildout is a moving target with an uncertain payback timeline.

This marks the latest in a series of capex increases over the past year.

In April, Meta shocked markets by raising its full-year guidance to as much as $145 billion, citing higher costs for AI components and data center construction. That announcement triggered a similar sell-off, as investors questioned whether the company could maintain its historically high free cash flow generation while simultaneously funding one of the largest infrastructure projects in corporate history.

Legal Costs

The $2.4 billion legal charge in the quarter relates to ongoing litigation around youth safety, data privacy, and content moderation practices. While Meta has faced regulatory scrutiny for years, the size and frequency of these charges are beginning to shift market perception from viewing them as isolated events to treating them as a recurring cost of doing business. The company’s decision to raise the low end of its operating expense guidance further suggests that management expects legal and compliance costs to remain elevated for the foreseeable future.

This development adds another layer of complexity to the investment case. Even as Meta invests heavily in AI to improve ad targeting and user engagement, it must simultaneously allocate significant resources to legal defense and regulatory compliance. The result is margin compression at precisely the moment when markets had been hoping to see operating leverage from the company’s AI investments.

Guidance Only In-Line

Meta guided third-quarter revenue to a range of $61 billion to $64 billion, with a midpoint roughly in line with the $63.15 billion consensus. While this implies continued double-digit growth, it offers no upside surprise and does little to offset concerns about the trajectory of profitability.

After months of speculation that Meta’s AI investments would begin to unlock new revenue streams, whether through enhanced ad products, enterprise AI tools, or even a potential cloud services offering, the guidance suggests that any such monetization remains quarters or years away.

Meta’s strategy rests on the belief that today’s infrastructure investments will compound into durable competitive advantages. The company is building out one of the world’s largest AI compute clusters, developing proprietary large language models, and integrating AI across its Family of Apps to improve content recommendations, ad targeting, and user engagement.

Early signs are promising: ad revenue growth remains robust, and engagement metrics continue to trend positively.

Yet the market is demanding more tangible proof that this spending will translate into incremental profits, not just incremental revenue. With earnings per share declining year-over-year despite 28% revenue growth, the current trajectory suggests that Meta is running faster just to stay in place. Free cash flow, historically a strength for the company, is expected to compress significantly in 2026 under the weight of elevated capex.

Sector-Wide Spending Scrutiny

Meta’s challenges are not occurring in isolation. Across the technology sector, investors are beginning to question whether the massive capital outlays for AI infrastructure are justified by the near-term revenue opportunities. Alphabet recently reported its first quarter of negative free cash flow in years, driven by similar AI-related spending. The broader narrative is shifting, and companies that cannot demonstrate clear monetization paths are facing valuation pressure.

For Meta, this shift in sentiment is particularly acute because the company’s AI investments are largely defensive in nature. Unlike Microsoft or Amazon, which can sell AI compute and services to external customers, Meta’s AI spending is primarily aimed at improving its own products. That makes the return on investment harder to quantify and leaves the company more exposed to scepticism about whether the spending is excessive.

The Meta stock price had jumped into mid July on rumours of new commercial avenues, and has fallen back just as sharply as the company failed to confirm. This particular pattern in META has been seen previously, where significant selling in 2025 caused by what the market perceived as overexuberant capex spending was followed by a huge rally when costs were trimmed. There may have been some front running a similar scenario in the print, only to be met with an increased spending guide that raised more than a few eyebrows.

From a technical perspective, what had been shaping up as something of a bullish pennant on the five year chart could be set to test the lower boundaries on the latest move. There could be plenty more movement in this one either way, as markets work through the print, and analysts weigh in.