Earnings Preview | The First Major Test Amid the AI Confidence Crisis: Can Meta (META.US) Cross the Intersection of "Burning Cash" and Monetization?

Title context: Earnings Preview | The First Major Test Amid the AI Confidence Crisis: Can Meta (META.US) Cross the Intersection of "Burning Cash" and Monetization? Text: Amid a confidence crisis in AI trading, Meta will release its third-quarter 2026 earnings report after the U.S. market close on October 21, Eastern Time, becoming the first large technology giant to face market scrutiny in this wave of doubt. For investors, the key to this earnings report lies not on the revenue side but on the spending side: whether the full-year capital expenditure guidance remains unchanged, and whether AI investment can be proven to be translating into sustainable revenue growth. In recent years, the AI-driven rally that has supported the stock market has mainly been driven by strong earnings from large technology groups. However, Venu Krishna, head of U.S. equity strategy at Barclays, said, "There is a lot of anxiety right now, especially during the election period ahead of next month's U.S. midterm elections." Over the past week, investor confidence in the companies driving the AI boom has been severely damaged, with the market worried that the revenue generated by the technology cannot match expectations. Chip giant Nvidia, a key link in the industry, alone saw more than $350 billion in market value evaporate this week. The Philadelphia Semiconductor Index fell more than 11% this week, while the tech-heavy Nasdaq 100 fell 5.5%. Against this backdrop, Meta's earnings report due after the close on Wednesday will be a major test of Wall Street's AI sentiment before Alphabet, Microsoft and Amazon all report next week. "This quarter's bar is very high"; revenue beat is not difficult Meta previously guided third-quarter revenue at $61 billion to $64 billion, up 19% to 25% from $51.2 billion a year earlier, with the midpoint implying about 22% growth, a marked slowdown from 28% in the second quarter. The institutional consensus expects revenue of about $63.3 billion to $63.9 billion, up 23% to 25% year over year. Although Meta's third-quarter revenue is expected to exceed $63 billion, analysts estimate its growth rate will slow and adjusted operating profit will fall to $18.8 billion, below both the previous quarter and the third quarter of 2025. Venu Krishna, head of U.S. equity strategy at Barclays, noted that the current bar is "very high": in the previous quarter, companies that missed expectations were heavily punished, while companies that beat expectations only received modest gains. The profit side is more complicated. According to consensus estimates compiled by the market, as the AI investment costs of the Facebook parent begin to show, the operating margin is also expected to narrow to slightly below 30%, and adjusted operating profit is expected to fall to about $18.8 billion. Earnings per share data may be significantly distorted by one-time items: Bank of America expects Meta to record $10 billion in legal expenses related to state attorneys general, pushing its Q3 EPS forecast down to $3.79, far below the market consensus of about $6.08; however, excluding that expense, underlying earnings are still expected to beat expectations. Capex and cash flow: the biggest uncertainty In the second quarter, Meta's operating cash flow was $31.9 billion, capital expenditure was as high as $31.1 billion, and free cash flow was only $784 million, far below $8.549 billion a year earlier. The third quarter may be worse: institutional consensus shows free cash flow will turn negative to -$9.14 billion, with single-quarter capital expenditure reaching $40.97 billion. Full-year capital expenditure guidance remains at a high level of $130 billion to $145 billion. About $50.9 billion was consumed in the first half, implying second-half capital expenditure of $79 billion to $94 billion. The funding gap is being bridged through debt: in the second quarter, Meta issued $24.9 billion in long-term debt, bringing its long-term debt balance to $83.7 billion. Chief Financial Officer Susan Li explicitly stated that future infrastructure financing will use "a higher proportion of debt." Bank of America expects Meta to narrow its 2026 capital expenditure guidance to $135 billion-$145 billion, while raising its 2027 capital expenditure forecast to $205 billion to reflect infrastructure demand for Muse AI products and enterprise AI initiatives. A comment from Chuck Carlson, chief executive of Horizon Investment Services, highlights the core contradiction: "Rising capital costs mean this capex explosion will become more expensive, and investment returns must clear a higher bar. Meta will be the first to try to answer this question." Advertising engine: existing evidence of AI monetization Advertising remains an important cash flow pillar for Meta. Second-quarter advertising revenue was $59.363 billion, up 27.5% year over year, accounting for more than 97% of total revenue. More importantly, AI-driven advertising products have formed a quantifiable revenue contribution: Advantage+ has an annualized revenue run rate of more than $75 billion, a figure CFO Susan Li confirmed on the second-quarter earnings call. Bank of America's advertising channel survey shows that AI-driven targeting and automation are helping advertisers achieve stronger returns, and the bank expects Q3 advertising revenue to reach $62.2 billion, up 24% year over year. The market will closely watch the growth rate of ad impressions and changes in average price per ad in this earnings report to judge whether AI's improvement in advertising efficiency is continuing. Muse: a new option, still to be validated Muse, the AI agent launched in September, is an important catalyst for this round of stock price rebound, driving Meta up about 27% in September alone, as the market's positioning of the company began to shift from "AI cash burner" to "AI monetizer." As of October 12, Muse had more than 8.9 million downloads and 2.23 million daily active users. Meta launched commercialization on October 12, offering subscription plans at $20 and $100 per month, but no revenue data has been disclosed. Concerns also exist: Muse's 14-day retention rate is 22%, slightly below ChatGPT's level in the same period; its daily active users are still less than 0.05% of Meta's total daily active users. Ben McMillan, chief investment officer at IDX Advisors, noted that Meta still needs to prove it can convert user growth into revenue. Truist, meanwhile, raised its target price to $1,000, the highest on Wall Street, citing Muse's strong early adoption momentum and having incorporated Muse's performance contribution into its forward forecasts. Reality Labs: a continuing drag The metaverse unit Reality Labs remains a persistent financial drain. In the second quarter, the unit posted an operating loss of $4.62 billion, bringing cumulative losses since the end of 2020 to more than $80 billion. Zuckerberg previously said losses at the unit may peak this year, but the market is still waiting for clearer signals of narrowing. Despite spending concerns, Wall Street's overall stance on Meta remains positive. Of the 19 analysts tracked by Visible Alpha, 18 gave a buy rating, with an average target price of about $878; the consensus rating from 63 analysts surveyed by S&P Global was "strong buy," with an average target price of $814.51. The options market is pricing in a potential post-earnings stock move of about 6%-7%.