Meta's Spending Spree: AI Labs Drain Ad Revenue

Meta's advertising revenue saw a strong 28% year-over-year increase in the June 2026 quarter, yet the allocation of its earnings has fundamentally changed. Capital expenditures have escalated dramatically, consuming 39.1% of revenue in the twelve months through the June 2026 quarter, a significant rise from Meta's historical average of 18.5%.

This heightened investment includes infrastructure for data centers and a new venture with BlackRock to develop a 1-gigawatt data center in El Paso, Texas. Consequently, Meta's free-cash-flow margin has narrowed to 18.0%, less than half of its historical 32.8%.

To bridge the financial gap, Meta has increased its debt levels to 25.0% of total assets, up from a historical 7.0%. Management indicates this borrowing strategy aims to reduce the overall cost of capital, even as the company retains more cash and securities than debt.

The company attributes this substantial spending to investments in Artificial Intelligence, including training models at its Superintelligence Labs and enhancing business and personal agents. Management believes these compute resources offer more profitable applications than simply selling the compute itself, despite the time lag for new data centers to generate revenue.