Analysis
Meta Fell Nearly 7% the Day After Its Beat: Free Cash Flow Was −$2.12 Billion, the First Negative Quarter Since 2012, and Its Credit Default Swaps Hit a Record
Meta shares fell nearly 7% to about $650 on October 22 after its third quarter showed negative free cash flow of $2.12 billion, as capital spending of $34.91 billion exceeded $32.79 billion of operating cash flow. Meta also raised the bottom of its 2026 capex range to $135 billion, and its five-year credit default swap spread reached an all-time high.
On Wednesday evening Meta's shares rose as much as 5% after hours on a revenue beat. On Thursday they closed down nearly 7%, at about $650, according to CNBC, after investors had read the cash-flow statement. Revenue of $64.60 billion, up 26%, was never the issue. The issue was that Meta generated $32.79 billion of cash from its operations in the third quarter and spent $34.91 billion on capital expenditure, mostly data centres and servers for AI, leaving free cash flow of negative $2.12 billion. Several outlets, including GuruFocus, reported that it was Meta's first quarter of negative free cash flow since its listing in 2012.
The outlook makes the gap a trend rather than an accident. Meta now expects 2026 capital expenditure of $135 billion to $145 billion, raising the bottom of the range from $130 billion while keeping the top. With operating cash flow running at roughly $130 billion a year, that leaves little or nothing for buybacks and the dividend without borrowing more. CNBC reported that the spread on Meta's five-year credit default swaps, the price of insuring its debt against default, reached an all-time high on Thursday. The level is still that of a highly rated company, but the direction is what credit investors watch.
The new share class fits the same story. Alongside the results Meta announced a non-voting Class C stock, to be distributed as a one-for-one dividend effective in January 2027, and said the shares would give it "the ability to finance its growth" while maintaining its "founder-led structure." Read with the cash-flow statement, that is a company preparing more ways to pay for the build-out: cash from operations, bonds, and a stock that can be issued without diluting the founder's votes. The $9.89 billion legal charge for the settlement with 52 state attorneys general, which halved reported operating income, was largely ignored on Thursday; investors had decided it was a one-off, and the capex was not.
The reaction was not limited to Meta. Nvidia fell about 4.4%, the chip index lost 6.7% and the Nasdaq 2.6% on a day when the market treated AI spending as a cost to its owners rather than revenue to its suppliers. That is the tension that will run through the rest of the megacap reports this season: each extra billion of capex is sales for chipmakers and a cash-flow question for the company paying. Meta answered it in the quarter's numbers. The stock's move was the market's reply, and the next one is due when Meta reports its fourth quarter and gives its first formal outlook for 2027.