[Recap] Meta’s Q2 2026 Earnings: Revenue Up 28%, Net Income Down 14%, Free Cash Flow Crushed 91% by AI Spending

Hey everyone, Hirokichi here.

On July 28, 2026 (local time), Meta Platforms (Meta) reported its earnings for the second quarter of 2026 (April-June). Revenue beat expectations, but net income fell well short of estimates – a classic case of “revenue up, profit down.” Shares dropped nearly 10% in after-hours trading following the announcement. Let’s break down the key numbers and what’s next.

Revenue up 28% to $​60.8 billion, advertising business firing on all cylinders

Let’s start with the good news. Revenue came in at $60.80 billion, up 28% year-over-year, beating the market consensus of around $60.2 billion. Advertising revenue, which makes up the bulk of the total, rose 27% to $59.36 billion. The core ad business is in excellent shape.

Family daily active people (DAP – the combined daily user count across Facebook, Instagram, WhatsApp, and Messenger) reached 3.60 billion, up 3% year-over-year. Ad impressions (the number of ads shown) rose 14%, and the average price per ad rose 12%. Both volume and pricing are growing, which I think is a genuinely healthy sign for the ad business.

Net income down 14%, EPS (earnings per share) badly misses estimates

On the profit side, though, things were rough. Net income came in at $15.85 billion, down 14% year-over-year, and diluted EPS (earnings per share) was $6.18 – well below the analyst consensus of roughly $7.1-7.2.

The main culprits were a $2.40 billion charge related to legal proceedings and $1.18 billion in severance costs tied to the May 2026 layoffs. Those two items alone add up to $3.58 billion in one-time hits. Total costs and expenses ballooned to $42.03 billion, up 55% year-over-year, and the operating margin fell from 43% a year ago to 31%.

As the chart above shows, revenue is climbing while operating income is actually shrinking. “Revenue up, profit down” means costs are growing faster than sales. In Meta’s case, that’s driven by AI-related investment layered on top of one-time charges.

Capex surges to $​31.1 billion, free cash flow crushed 91%

Another number worth watching is capital expenditure. This quarter’s capex (including finance lease principal payments) came in at $31.08 billion, roughly double last year’s $17.01 billion. That’s how much money Meta is pouring into AI model training and data center construction.

As a result, free cash flow (the cash left over after operating cash flow minus capex – money the company can freely deploy) dropped to just $784 million, down about 91% from $8.55 billion a year ago.

Operating cash flow itself was a healthy $31.86 billion, so this isn’t a sign that the core business is struggling. It’s just that capex is being deployed even faster than that cash comes in, leaving almost nothing left over. Think of it like a household where income is rising, but an even bigger purchase (the capex) keeps eating up the gains, so savings barely grow.

Reality Labs’ cumulative losses approach $​88 billion

Meta’s VR/MR (virtual and mixed reality) division, Reality Labs, posted another operating loss of $4.62 billion this quarter. That’s wider than the $4.03 billion loss in the prior quarter (Q1 2026), pushing cumulative losses since 2020 to roughly $​88 billion. Segment revenue did grow 16% year-over-year to $431 million, but it remains tiny relative to the scale of investment.

Shares dropped nearly 10% in after-hours trading

The EPS miss and the collapse in free cash flow sent Meta shares tumbling in after-hours trading, down as much as high-9% at one point. Shares fell from a regular-session close of $585.61 to around the $529 level in after-hours trading. While the market clearly credited the strong revenue growth, it’s getting nervous about “earnings quality” and how quickly the AI spending will pay off.

What’s next: AI investment set to expand further, Q3 growth expected to slow

Along with the earnings, management laid out the following outlook.

(1) Full-year 2026 capex guidance was raised to $130-145 billion (from $125-145 billion previously), with the lower end pushed up as the company doubles down on AI and data center investment. Meta also announced a $14 billion, 1-gigawatt data center joint venture with asset manager BlackRock in El Paso, Texas (BlackRock holding 80%, Meta 20%). Meta has laid out plans to invest $600 billion in AI infrastructure by 2028 – if anything, the pace of investment is accelerating.

(2) Third-quarter revenue guidance is $61-64 billion (about 22% year-over-year growth at the midpoint), a deceleration from Q2’s 28% growth pace.

(3) Full-year total expense guidance was raised to $165-169 billion, and the tax rate outlook was raised from 13-16% to 15-17%, suggesting cost pressure will persist for a while. Management also flagged that several youth-related lawsuits are scheduled in the U.S. this year, which could have a material impact on results.

CEO Mark Zuckerberg said “AI is accelerating our core business today, powering our next generation of products, and opening the door to entirely new enterprise opportunities,” underscoring that much of the company’s compute is being directed toward training AI models and building new products like personal AI agents. Backed by the strength of its core advertising business, Meta looks set to keep prioritizing AI investment over near-term profit. Microsoft (MSFT) is following a similar playbook, with its stock surging on a strong Azure cloud performance – the AI investment race is a common thread across the major tech companies right now (related read: Weekly Stock Picks: A Deep Dive on Murata Manufacturing and Microsoft).

As an investor, I’ll be watching three things going forward: (1) whether the ad business can keep up this growth rate, (2) when AI investment starts translating into concrete returns, and (3) when Reality Labs’ losses will finally peak.

Let’s keep at it, slow and steady. See you next time!

日本語版はこちら → 【決算まとめ】メタ2026年Q2決算（日本語版）

* This article is for informational purposes only and does not recommend any specific investment. Please make investment decisions at your own responsibility.

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