AI trading worries ease! Muse gains momentum as Meta (META.US) continues to "burn compute."

Meta (META.US) delivered a third-quarter report after the bell on Wednesday that "ramped up both ends of the ledger": revenue for the quarter ended Sept. 30 came in at $64.60 billion, up 26% year over year, above the $63.37 billion market consensus compiled by LSEG; fourth-quarter revenue guidance of $73 billion to $76 billion also had a midpoint above expectations. But in the same report, the company raised the lower bound of its 2026 capital expenditure guidance from $130 billion to $135 billion (the upper bound of $145 billion unchanged), and announced the creation of a new class of non-voting shares. In a quarter when free cash flow has already turned negative, Zuckerberg has opened a new financing channel for the AI arms race. Revenue side: Advertising is still the money printer, Muse AI growing strongly Advertising remains the main cash engine. Third-quarter ad impressions rose 10% year over year and the average price per ad rose 14%, while family daily active people (DAP) reached 3.64 billion, up 3% year over year; the midpoint of fourth-quarter guidance is $74.5 billion, up about 24% year over year. Both Reuters and Bloomberg noted that the vast majority of Meta's revenue still comes from advertising, and AI's main role at present remains optimizing ad targeting and recommendations and boosting user engagement. The real incremental narrative comes from Muse. Zuckerberg said on the earnings call that within a month and a half of launch, more than 10 million users in the U.S. and Canada had opened Muse accounts, with momentum still strong; he expects Muse to eventually serve "billions of people," and that these users "may generate more revenue than the average Meta user." For now, Muse remains free for most people, and Meta makes money through transaction fees paid by enterprises, subscriptions for heavy users, paid users who want access to the most powerful models, and paid tools for enterprises; Zuckerberg said, "If compute efficiency continues to improve rapidly in the coming yearswhich we think is highly likelyMuse will remain highly profitable for many years." However, the timeline for AI to pay off has been pushed far out. CFO Susan Li said plainly in the report: "These investments will take longer to generate returns than investments in our core business." Wells Fargo & Company in an Oct. 6 report projected Meta's 2027 operating expenses at about $212 billion, with AI revenue not making a material contribution until 2028. In addition, some enterprises have restricted access to Muse due to security concerns. A new enterprise-side pipeline is also being laid: on Sept. 28, Meta established Meta Enterprise Platforms and hired then-MongoDB CEO Chirantan "CJ" Desai as Chief Enterprise Platforms Officer, reporting directly to Zuckerberg; MongoDB shares fell more than 17% that day; the platform has not yet disclosed pricing, available regions, or a customer list. Spending side: Lower bound of capex guidance raised In the third quarter, Meta's capital expenditures (including principal payments on finance leases) reached $34.91 billion; the company spent about $86 billion in the first nine months. On that basis, to land within the full-year range of $135 billion to $145 billion, it needs to spend about $49 billion to $59 billion in the fourth quarter. The market had originally expected even more: analyst models surveyed by FactSet had projected third-quarter capex of about $41 billion and fourth-quarter capex of more than $49 billion, and FactSet expects Meta's 2027 spending to reach $196 billion. In other words, Meta raised the lower bound rather than the upper boundit did not open the spigot wider, it merely raised the "most conservative case." Other expense items are tightening. The report shows headcount down 15% year over year; Reality Labs is expected to lose up to $19 billion this year, falling to about $15 billion in 2027, with the resources saved "mainly used for AI." Cash flow: From "printing money" to "overdraft," one-time litigation charge rewrites the income statement What really stands out is cash flow. Meta's third-quarter free cash flow was -$2.12 billion, versus positive $10.63 billion a year earlier; the figure was better than the market's prior expectation of about -$9.4 billion, and marked the first negative turn since the company went public. At the same time, according to the report, third-quarter operating cash flow was $32.79 billion, and cash, cash equivalents and marketable securities totaled $82.45 billion as of Sept. 30the company still has ample operating cash generation capacity, with the shortfall on the capital expenditure side. The income statement was distorted by a one-time factor: due to a $9.89 billion charge related to the August settlement with 52 state attorneys general, third-quarter diluted earnings per share were $3.83; excluding that charge, EPS would have been $7.40. The financing move is therefore logical. Meta will create a new non-voting Class C common stock, planned to take effect in January 2027, to be distributed as a stock dividend to existing shareholders on a 1:1 basis, with an effect equivalent to a "two-for-one" stock split; the new shares will be used for capital raising, employee compensation and potential acquisitions, while not diluting CEO Mark Zuckerberg's control, and the company said the move will ensure Zuckerberg continues to lead the company "into the next era." Class A shares will continue to trade on Nasdaq, and the Class C shares will also apply to list on Nasdaq. External debt is likewise fuel for this machine. Data from Goldman Sachs Group, Inc. shows that as of mid-2026, global AI-related debt issuance reached $489 billion, with the five major hyperscalers accounting for nearly 40%; Meta earlier this year issued about $30 billion in bonds for data centers; in July, Meta's Texas data center project issued $12.55 billion in bonds at a yield of 7.534%, a premium of about 287.5 basis points over the 10-year U.S. Treasury at the time. Off-balance-sheet structures are also expanding: the Hyperion data center in Louisiana raised debt through an entity jointly owned by Meta and Blue Owl, with reports cited at about $27 billion, and Meta holds only a minority stake but has committed to a long-term lease. Set against the neocloud selloff: Meta is both a buyer and increasingly a referee This is precisely where this earnings report is most instructive about the current "compute concerns." Over the past two weeks, the AI infrastructure sector has suffered a selloff: as of Oct. 16, CoreWeave shares had fallen more than 15% in a single week, and the yield on its 2030 bonds had jumped 500 basis points to nearly 16%, with the market focused on its $50 billion in debt; CoreWeave sits in the middle of "circular financing arrangements" between chipmaker NVIDIA Corporation and customers (OpenAI, Meta, etc.). Gartner expects that by 2030 more than 80% of neocloud providers will cease to operate independently, and estimates that AI infrastructure spending could reach $7 trillion by 2030 while AI-related revenue will not exceed $3.6 trillion; AI-related bond issuance fell from $113 billion in June to $23 billion in September. Meta's books offer three contrasting signals. First, demand has not collapsed. Muse needs enormous compute, which is one reason it has not yet launched globallya company sitting on $82.45 billion in cash saying it "doesn't have enough compute" is itself the most direct footnote to demand; Musk also said this week on the SpaceX call that compute demand far exceeds supply. Second, Meta is shifting from "selling compute" to "using compute itself." Even as Meta launches its enterprise platform and tests externally supplying compute, Wells Fargo & Company in October removed an estimated 500 megawatts of compute resale in 2027 (about $5 billion of high-margin revenue) from its model, precisely because of Muse's successcompute must first go to its own products. For neoclouds, this is both order support and a double squeeze from supply substitution. Third, the divergence is not in AI demand but in the cost of capital. Meta has $32.79 billion in third-quarter operating cash flow and $82.45 billion in cash as a cushion, making it a self-funded buyer; intermediaries like CoreWeave must roll over debt, and JPMorgan estimates their blended cost of capital at 9%11%. When financing costs are repriced, the first to come under pressure are leveraged intermediaries, not self-builders covered by cash flowbut Meta itself is also increasingly borrowing and using off-balance-sheet arrangements, which puts it on the same interest-rate curve as the neoclouds, just further ahead. Legal tail risk: $25 billion penalty starts a long race On the same day as the earnings report, New Mexico Judge Francis Mathew ordered Meta to pay the state $25 billion. Mathew found that the amount owed under state law exceeded $219 billion, ultimately reduced to $25 billion; in September a jury found the company and its management made 26 misleading statements on issues including data privacy and hate speech, implying more than 43 million violations of the state's consumer protection law; state attorney Randi McGinn had sought $35 billion to $40 billion at an Oct. 1 hearing, while Meta argued for a cap of $3.45 billion. Meta Chief Legal Officer C.J. Mahoney said the company is confident it will prevail on appeal and called the ruling one that "makes it nearly impossible to do business in New Mexico"; the state's attorney general, Ral Torrez, called it "one of the largest financial penalties against a company in U.S. history." Meta previously paid $5 billion to the U.S. Federal Trade Commission in 2019 over the Cambridge Analytica matter, and an August multi-state settlement included another $459.2 million from six states related to Cambridge Analytica; earlier this year New Mexico also won $942 million in two related trials, with another trial set to begin next week. Gil Luria, head of technology research at D.A. Davidson, believes the ruling is costly but unlikely to affect the company's valuation"Meta has a market cap of nearly $2 trillion, and it will likely keep appealing and drag the case out." Minda Smiley, senior analyst at Emarketer, cautioned that if AI agents become more mainstream, privacy and security concerns will only intensify, and "given Meta's reputation in this area, it could ultimately hurt it." Market reaction and institutional views Data shows Meta shares had risen about 6% year to date as of Wednesday's U.S. close. The social media giant's stock closed Wednesday at 697, with a market cap of $1.79 trillion and a price-to-earnings ratio of 26.52. After the results, Meta rose 2.08% after hours to $712 as of publication. Goldman Sachs Group, Inc. reiterated its "Buy" rating on Meta and maintained its $860 price target. Goldman Sachs Group, Inc. said it expects investors to react positively to Meta's third-quarter 2026 results. The report showed quarterly revenue exceeded the upper end of the company's prior guidance range, with advertising revenue up 26% year over year. Goldman Sachs Group, Inc. noted that Meta management expressed optimism on the earnings call about scaling AI and its positive impact on the core business, while flagging continued increased investment ahead but without providing specific quantitative figures. Meanwhile, Raymond James reiterated its "Strong Buy" rating on Meta Platforms with an $860 price target, emphasizing that the company's upcoming results are drawing intense market attention. Citizens maintained an "Outperform" rating with an $885 price target, citing smooth AI progress and strong advertising performance. On the other hand, BMO Capital reiterated a "Market Perform" rating with a $580 price target; while acknowledging improved momentum in AI products, it remains cautious on the scale and timing of AI monetization. In addition, the sell-side lineup is already crowded: BofA's Justin Post has a Buy and $810 target, Deutsche Bank's Benjamin Black a Buy and $820, Bernstein's Mark Shmulik a Buy and $800, and Wells Fargo & Company in October raised its target to $1,000 from $796; the average price target of 50 analysts compiled by Zacks is $824.56. A single line from senior analyst Jesse Cohen roughly sums up the sentiment shift in this earnings report: "The market has shifted from punishing Meta for spending to rewarding it for having a compelling product story."