S&P Global revises outlook on Meta to negative on cashflow concerns

On Friday, S&P Global Ratings changed its outlook on Meta Platforms from stable to negative, pointing to significant doubts about the company's financial health. The social media giant's capital spending and free operating cash flow have been a cause for concern. With AI driving up capital expenditure to unprecedented levels, investors are worried about whether the sector can generate returns promptly.

In the third quarter, Meta projected annual capital expenditure to range between $135 billion and $145 billion, while reporting a free cash flow deficit of $2.12 billion. To fund its AI initiatives, Meta plans to sell $97.5 billion of stock. S&P believes Meta's ability to monetize its AI investments is less promising than its competitors, and it remains unclear when revenue streams from these investments will surpass their growing costs in the coming years.

The ratings agency forecasts Meta to generate free operating cash flow deficits of $39 billion in 2026 and $71 billion in 2027. Elevated spending could keep these deficits negative beyond 2028, with S&P expecting the company to finance its 2028 cash shortfall entirely through debt. Given the uncertainty surrounding Meta's future capital expenditure and ambitious AI investment plans, S&P is less confident that the company will curb its spending as previously anticipated.

S&P also noted that Meta's leverage could surpass 1.0x by 2027, crossing the agency's threshold for an AA- issuer credit rating. A Meta spokesperson disagreed with S&P's assessment of the company's AI monetization capabilities, stating that the company sees significant product and business opportunities ahead, bolstering its strong credit profile.

As of September 30, Meta's long-term debt amounted to $80.92 billion. S&P's decision to lower its outlook on Meta comes after a similar downgrade for Broadcom earlier this year, attributed to the chipmaker's high exposure to a few big customers due to its rapid AI growth.