New Meta Rating as Spending Weighs on Expectations

With our moves to put some capital to work on Thursday morning completed, let’s turn our focus to the shares of Meta Platforms (META) following the company’s at best mixed quarterly results and stepped-up outlook for expenses, that are not only weighing on the shares but raising other questions.

The market reaction to those puts META shares back between where they were between late March, when they were oversold, and where they were in late June. Odds are that the fallout from the company’s earnings fallout that will drive EPS cuts and reduce price targets across Wall Street will push the shares into an oversold condition. That makes it very difficult to pull the plug on the Portfolio’s position in the here and now, but we are downgrading our rating on the shares, something we telegraphed in our opening comments for Thursday.

At the same time, there’s little question that Meta continues to not only win advertising revenue dollars but its efforts to leverage AI to improve its monetization of those dollars are improving. And what we saw in one of the key metrics that we track for Meta, Family Average Revenue per Person (ARPP), points to that success. ARPP reached $16.86 in Q2 2206, putting ahead of the $16.56 reached in Q4 2025. Other key metrics also bear that out — while daily active people rose 3% year over year to 3.60 billion in June, ad impressions delivered increased by 14% year-over-year and average price per ad increased by 12% year-over-year.

During the earnings call, Meta shared that its enhanced ad-ranking and user-understanding models generated an 8.3% increase in ad clicks and a 15.7% uplift in Facebook conversions. Early LLM-based ad pilots produced a further 1% increase in Instagram app conversions. And, more than 9 million small businesses are using at least one generative-AI creative tool, with image-generation adoption more than doubling during the quarter. That adds credence to rising AI adoption and usage, and to the extent that those businesses do more of that, that bodes well for Meta and its monetization efforts.

Typically, the final quarter of the year is the seasonally strongest of the year, and with that in mind, the mid-term elections this year are expected to drive even greater spending than the last presidential cycle. We see Meta benefitting from that spending as well as the ongoing shift to digital advertising from print, radio, broadcast and even cable, especially as Meta leans further into video advertising across its platforms.

But that was not where Meta’s earnings report and guidance stopped.

The problem that Meta has, and it’s one that is vexing Wall Street, is the degree of its spending. We touched on this quickly in our opening comments, but the gist is that spending in Q2 2026 surprised to the upside in a big way, and that spending is ramping even higher in the back half of this year. That led the company to miss by a wide margin on Wall Street’s bottom-line expectations for the quarter in the face of reporting a 28% year-over-year increase in revenue. Moreover, the company’s guidance points to further spending ahead with total expenses hitting between $165 billion to $169 billion and that implies an increase of more than 20% in the back half of the year compared to the first half.

Here’s the thing, though, if we go back and look at the forecasted level of expenses Meta management guided for this year, that figure was between $162 billion to $169 billion. So, like its capital spending forecast for this year that went to $130 billion to $145 billion from the prior $125 billion to $145 billion, Meta lifted the low end of its expense range guidance. But it’s not only that step up in expenses — Meta’s capex guidance also implies it will spend $80 billion to $95 billion in the back half of the year compared to the $49 billion in the last two quarters.

Measured against those tightened capex and spending forecasts, one of the underlying issues is Wall Street didn’t really do the necessary math when setting its 2026 EPS forecasts, and now those folks are making up for that.

Going from a 1 to 3 rating

Splashing some cold water on those Wall Street faces was the pronounced fall in Meta’s free cash flow. It fell to $784 million in Q2 2026 from $12.4 billion in Q1 2026 and $10.9 billion in the year ago and is likely to either remain at such levels or move higher as Meta’s H2 2026 spending increases.

That means we and Wall Street need to not only adjust our thinking about cash flow levels, but it also means that for Meta to continue to spend along the lines it is telegraphing, it will need to seek outside sources of capital

That could be in the form of floating additional debt, but it could also mean leasing some of its excess cloud capacity to third parties. Speculation is that Meta could sign a two-year, $10 billion dollar deal with Anthropic. We get that against its hiked spending plans, $5 billion a year may not sound like much, but if we see further steps in that direction, we could see the market re-think Meta’s overall spending plans and profit potential.

Right now, however, the market is understandably focused on those spending levels and the impact to profits and cash flow even though Meta still calls for its 2026 operating income to be above that for 2025. The math tells us that to match the $83.3 billion in 2025 operating profit, Meta would need to generate $41.6 billion in the second half of this year compared to the $18.8 billion posted in Q2 2026. Certainly possible, but questions stemming from spending and capex levels are making Meta once again a show me story.

If Meta can deliver on some alternatives that mitigate its internal spending levels and bring support for improving operating profit prospects in the coming quarters, that would be set of catalysts likely to fuel a rebound in the shares. For that reason, we are not inclined to exit the Portfolio’s position in Meta shares but instead downgrade our rating to a Three from One.

Connecting the Meta Dots

Those stronger spending levels in the back half of this year bring support for our additions to Marvell (MRVL) and Applied Materials (AMAT) earlier on Thursday as do spending levels at Microsoft (MSFT). We’ll touch on those in our upcoming Microsoft note, but the combined increase point to continuing tailwinds for Arista Networks (ANET), which counts Meta and Microsoft among its larger customers.

The continued buildout in AI and data center capacity is also positive for our position in Eaton (ETN), which reports on Friday. Let’s remember rising aircraft production levels at Boeing (BA) and Airbus (EADSY) are a positive as well for Eaton.

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At the time of publication, TheStreet Pro Portfolio was long AMAT, ANET, BA, ETN, META, MRVL and MSFT.