Meta delivered another strong quarter on the surface, with Q2 revenue climbing 28% year over year to $60.8 billion, slightly ahead of expectations. GAAP EPS fell 13% to $6.18, but that was largely due to $2.4 billion in legal costs tied to youth safety lawsuits and $1.2 billion in severance expenses

Excluding those one time charges, operating income would have increased 9% instead of falling 8%. Even so, investors focused on the bigger picture, sending the stock down as much as 10%

💸 AI Spending Eats Up Cash Flow

The biggest concern was cash flow. Meta generated $31.9 billion in operating cash flow but spent $31.1 billion on capital expenditures and finance leases, leaving just $784 million in free cash flow, a 91% drop from a year ago. The company also borrowed $24.9 billion and paused share buybacks. Meta has the financial strength to support these investments, but this quarter marked the first time its AI infrastructure spending essentially consumed all of its free cash flow and pushed it into the debt market

🏗️ Bigger AI Plans, Bigger Price Tag

Meta also raised the lower end of its 2026 capital spending forecast for the second quarter in a row, now expecting between $130 billion and $145 billion. To help manage those costs, the company is partnering on a 1 GW data center in El Paso, where BlackRock will own 80% of the project while Meta keeps a 20% stake and leases the entire facility. The arrangement reduces the upfront cash commitment but does not change Meta's long term investment plans

🤖 AI Is Already Driving Ad Growth

The encouraging part is that AI is already improving Meta's core advertising business. Ad revenue grew 27% as impressions increased 14% and average pricing rose 12%. The company's latest AI models drove an 8% increase in ad clicks and a 16% improvement in Facebook conversions. Meanwhile, Advantage+ reached an annual revenue run rate above $75 billion, showing that AI investments are already producing measurable business results.

👥 User Growth Keeps Momentum Strong

User growth also remained strong. Family Daily Active People reached 3.6 billion, Instagram surpassed two billion daily users, and Threads grew past 500 million monthly users. WhatsApp's paid messaging and subscription offerings also helped Family of Apps' "other" revenue exceed $1 billion for the first time.

Outside advertising, Mark Zuckerberg outlined additional ways to generate returns from Meta's AI investments, including paid access to its AI models and potentially renting excess computing capacity to outside customers, although building a competitive cloud business would still require significant investment

🔮 Monetization Is Coming, But Patience Is Required

Reality Labs posted another $4.6 billion operating loss despite revenue increasing 16%, helped by stronger demand for AI powered smart glasses. Looking ahead, Meta expects Q3 revenue between $61 billion and $64 billion, with the midpoint slightly below Wall Street's expectations, while full-year expenses are now projected at $165 billion to $169 billion. Meta's advertising business is becoming more profitable thanks to AI, and new monetization opportunities are starting to emerge.

The challenge is that the company's spending is happening immediately, while many of those new revenue sources will take much longer to make a meaningful impact