Meta Q3 revenue and Q4 guidance both exceed expectations, raises lower limit of AI capital expenditure, plans to issue new non-voting shares | Earnings Report Highlights

Meta's third-quarter revenue hit a record high, while simultaneously announcing the issuance of a new class of non-voting shares to prevent Zuckerberg from leaving the company's headquarters jurisdiction due to California's wealth tax, and to open financing channels for its massive artificial intelligence investment plan.

On Wednesday, Meta reported third-quarter revenue of $64.6 billion, up 26% year-on-year, surpassing analysts’ expectations of $63.3 billion. The company expects fourth-quarter revenue to reach between $73 billion and $76 billion, with the midpoint exceeding market forecasts.

Profit performance was significantly affected by a one-time legal settlement expense. Meta's diluted earnings per share for the third quarter were $3.83, below analysts’ average expectations of about $6.54. The company recorded a $9.89 billion legal settlement; after excluding this, earnings per share reached $7.40.

At the same time, Meta raised the lower end of its 2026 capital expenditure guidance from the previous $130 billion to $135 billion, with the upper limit remaining at $145 billion.

Meta shares surged 6% after hours before pulling back, up 2.2% at the time of publication.

Meta’s free cash flow turned negative for the first time since listing, at negative $2.2 billion for the reporting period, but still beat analysts’ prior expectations of negative $9.4 billion.

The company is investing tens of billions of dollars into chips and data center construction to gain an advantageous position in the competition with OpenAI and Anthropic, and this spending is steadily draining its historically ample cash flow.

In the third quarter, Meta’s capital expenditure (including financing lease principal repayments) reached $34.91 billion. The company adjusted its full-year capital expenditure guidance to $135 billion to $145 billion, raising the lower end from the previous $130 billion, reflecting ongoing substantial investment in AI infrastructure expansion.

The company announced that it will create a new class of non-voting Class C common stock, planned to take effect in January 2027. This arrangement aims to provide more funding sources for the company’s AI investments while avoiding the dilution of CEO Zuckerberg’s voting control.

This new class of shares will be distributed to existing shareholders in the form of a stock dividend. Meta stated that for every share held, shareholders will receive one new share, effectively a “2-for-1” stock split.

Meta issues non-voting new shares in exchange for Zuckerberg’s commitment to remain in California

Meta has reached an agreement with Zuckerberg to issue him non-voting Class C shares. In return, Zuckerberg is committed to residing in California or another jurisdiction where Meta’s headquarters are located for the next eight years.

This arrangement is also related to California’s proposed billionaire wealth tax. Zuckerberg previously stated that such a tax might force him to sell his voting Class B shares to raise funds for the tax, which could lower his voting stake in the company below 53%.

Under the agreement, Zuckerberg will be allowed to immediately sell 20% of the received Class C shares, equivalent to 10% of his overall economic interests, with the restrictions on the sale of the remaining shares being gradually lifted over eight years.

Meta’s special committee remarked that ensuring Zuckerberg works at company headquarters is crucial, especially as the company works closely with Meta Superintelligence Labs and faces intensifying AI competition.

Meta CFO Susan Li explained that the Class C shares are primarily a financing tool, helping the company raise funds for its AI business in a more flexible way, while avoiding the dilution of existing shareholders' voting interests.

Advertising business continues to grow, Q4 revenue guidance exceeds expectations

Advertising remains the main driver of Meta’s performance growth. In the third quarter, ad impressions grew 10% year-on-year, while average ad prices rose 14%. Family daily active people reached 3.64 billion, up 3% year-on-year.

Meta forecasts fourth-quarter revenue in the range of $73 billion to $76 billion, with a midpoint of $74.5 billion, representing about 24% year-on-year growth. This guidance is higher than the roughly $73 billion consensus from LSEG-polled analysts, indicating confidence in year-end ad demand and business momentum.

Growth in the advertising business also provides key support for AI investments. Meta is leveraging AI for ad placements and targeting, while also seeking to expand revenue streams beyond advertising through new AI products. However, whether the commercialization of these new businesses can keep pace with infrastructure investment remains to be verified by future performance.

Meta has positioned its consumer AI assistant Muse as central to its overall strategy, restructuring the organization around the Meta Superintelligence Labs responsible for the product, while announcing a new business line selling AI tools to enterprise clients.

According to market intelligence firm SensorTower, Muse has been downloaded over 10 million times since launching in September, offering subscribers two tiers at $20 and $100 per month.

In the first month following Muse’s debut, Meta’s share price rose by nearly 20%. An estimate from Truist Securities projects Muse could bring Meta about $28.5 billion in incremental revenue by 2030.

However, Muse still faces multiple obstacles: polls show generally low public acceptance of AI assistants; in addition, dozens of websites, including Amazon, have blocked Muse’s access, while some businesses have limited its integration due to security concerns, constraining its utility for shopping and similar use cases.

Legal settlement expenses drag down profit; cost growth worth attention

Meta posted third-quarter net profit of $9.86 billion, with diluted earnings per share of $3.83. The company included $9.89 billion in legal settlement expenses, resulting in a marked difference between reported profits and post-adjusted earnings.

Third-quarter revenue was above market expectations, but reported EPS came in below analyst forecasts. Excluding the legal settlement, per-share earnings reached $7.40, beating the consensus.

In August, Meta reached a settlement with nearly 48 U.S. states agreeing to pay up to $18 billion over ten years and promising to implement a series of restrictions on how minors use Facebook and Instagram, following accusations that Meta platforms were deliberately designed to be addictive to children.

On the day of the results release, a judge in New Mexico ordered Meta to pay a $25 billion fine, after a jury found the company misled users regarding its sharing of data with third parties, as well as in its enforcement of platform policies on hate speech and misinformation. The case involved British political consulting firm Cambridge Analytica.

However, cost pressure does not stem from a single legal matter. Meta’s total costs and expenses in the third quarter were up 68% year-on-year to $51.61 billion, outpacing the 26% revenue increase. Operating margin fell from 40% a year ago to 20%, reflecting the squeeze on profitability amid expanding AI investment.

Meta expects total expenses for full-year 2026 to reach $175 billion to $179 billion. As AI-related spending continues to climb, investors need to assess ad business growth, the pace of cost expansion and changes in cash flow, rather than evaluating operating performance solely based on per-share earnings excluding one-time items.