S&P Global Ratings revises Meta's outlook to negative due to AI spending and cash flow

S&P Downgrades Meta's Outlook

S&P Global Ratings has assigned a negative outlook to Meta, revising it from a stable outlook. This change reflects the credit agency's concerns regarding Meta's substantial capital expenditure (capex) on artificial intelligence initiatives and its recent negative free cash flow. Meta's credit rating remains AA-, but the outlook shift indicates potential for a future downgrade if current trends persist.

AI Investment and Monetization Concerns

The primary driver for S&P's revised outlook is the uncertainty surrounding Meta's ability to generate significant revenue from its AI investments. While Meta has introduced products like the Muse AI agent app and foundation models, S&P stated it is unclear when these will materially contribute to revenue beyond their rising costs. This contrasts with other tech companies also investing heavily in data centers and experiencing negative cash flow.

Financial Performance and Investor Reaction

Meta's third-quarter earnings report revealed a negative free cash flow of $2.12 billion, marking its first time in the red. The company also projected full-year capex to be between $135 billion and $145 billion. Following this report, Meta's shares dropped 7%, and the stock concluded October down 15%, its worst monthly performance in four years. Meta plans to raise $95 billion to fund its AI initiatives, with $35 billion from public equity offerings and $60 billion via an at-the-market program.

Meta's Disagreement with S&P

A Meta spokesperson expressed disagreement with S&P's assessment of its AI monetization capabilities. The company believes it has significant product and business opportunities ahead that support its credit profile. However, S&P remains uncertain that Meta will reduce its spending as previously anticipated, even though it expects capex growth to flatten starting in 2028.