S&P moves Meta's credit outlook to negative as AI spending outruns cash flow

S&P Global Ratings changed its outlook on Meta from stable to negative on Friday, leaving the AA- rating intact but warning that the company's artificial intelligence build-out has turned free cash flow negative. The judgement converts an argument about AI capital allocation into a credit question: the agency says Meta's capacity to turn AI investment into revenue is more limited than that of peers which sell computing capacity to cloud customers, because Meta applies the technology chiefly to advertising recommendations and content personalisation.

The third quarter shows the mechanism. Revenue rose 26 per cent year on year to $64.6bn, but operating profit fell 37 per cent to $13bn, a figure reflecting a $9.9bn settlement charge tied to litigation over adolescent mental health. Operating cash flow of $32.8bn was outweighed by roughly $34.9bn of capital expenditure, producing negative free cash flow of $2.12bn against a $10.6bn surplus a year earlier. Full-year capital spending is guided to $135bn-$145bn.

S&P expects capital expenditure above $225bn in the following year, projects a free operating cash flow deficit of $71bn, and sees the shortfall persisting past 2028 unless spending is curtailed, with the gap filled by borrowing; it expects leverage above 1.0 times by 2027, from about 0.1 times, against long-term debt of $80.9bn at the end of September. Commitments exceeding $800bn, centred on data centres and power infrastructure, include an important share of leases. Meta intends to raise $95bn — a total Liberty Times puts at $97.5bn — through a $35bn underwritten equity offering followed by $60bn under an at-the-market programme. The shares fell 7 per cent on the results and 15 per cent over October, their worst month in four years, and sit 20.9 per cent below the record $777.59 reached on 24 September.

Meta disputes the finding. Kamran Mumtaz, a spokesman, said the company respectfully disagrees with S&P's assertion about its AI monetisation capabilities and sees significant product and business opportunities ahead. Outside the technology sector, Santander, Novartis and Standard Chartered report gains: Santander attributes €194m of commercial value to AI programmes in the first nine months; Novartis chief executive Vas Narasimhan said AI is beginning to contribute to profit without quantifying the effect; and Standard Chartered finance chief Manus Costello linked AI to better client relationships and higher revenue. S&P has also cut Oracle to BBB- and moved Broadcom's outlook from positive to stable.

The markers to watch are the closing of Meta's equity raising and the agency's stated window of two years in which a downgrade could follow.