AI Spending Fears Return as Meta Costs and a Lam Research Slide Hit Stocks
New York stocks were headed for a heavy open on the 22nd, led by artificial intelligence names, even before trading began. Nasdaq 100 futures fell 1.76 percent, and an exchange-traded fund of semiconductor stocks dropped 3.34 percent in premarket trading. The relief that had lifted the market on strong earnings the day before cooled within a day.
The trigger was Meta's third-quarter results, released after the previous day's close. Meta's revenue rose 26 percent from a year earlier to $64.6 billion, topping market expectations of about $63.3 billion, InvestingLive reported. On the surface, the revenue was at a record level.
But the story inside the profit numbers was different. Earnings per share came to just $3.83. A legal charge of $9.89 billion, booked in connection with an August settlement with 52 state attorneys general over teen mental health litigation, dragged down profit. Excluding that charge, earnings per share would have been $7.40 and operating income $22.88 billion, Meta said.
What the market examined at greater length was spending. Meta's third-quarter capital expenditure was $34.9 billion, and the company narrowed its full-year capital spending outlook from between $130 billion and $145 billion to between $135 billion and $145 billion, raising the lower end. It also raised its full-year total expense outlook to between $175 billion and $179 billion. Free cash flow for the quarter was negative $2.12 billion, meaning the company spent more on artificial intelligence infrastructure than the cash it took in. Meta also unveiled a plan to issue a new class of non-voting shares to help fund its artificial intelligence investments.
A regulatory filing deepened the concern. Bloomberg reported that Meta's future spending commitments for artificial intelligence data centers, energy infrastructure and computing capacity total about $825 billion, up from nearly $700 billion disclosed in July. The obligations include $355.7 billion in leases that have not yet begun and $454.5 billion in contracts that cannot be canceled, with $121.4 billion coming due in 2027 alone.
The narrowed full-year outlook also implies a heavy finish to the year. Briefing.com calculated that the range of $135 billion to $145 billion implies fourth-quarter capital spending of roughly $49 billion to $59 billion. Third-quarter capital spending of $34.91 billion exceeded the quarter's operating cash flow of $32.79 billion, Briefing.com reported, which is how free cash flow swung to negative $2.12 billion from positive $10.63 billion a year earlier.
The stock's reaction swung as the details settled in. Meta shares rose 2.2 percent in after-hours trading immediately after the results, then fell about 3 percent in premarket trading, Reuters reported, and the slide deepened once trading opened. By early afternoon the shares were down about 7 percent, as the scale of the spending commitments outweighed the strength of revenue.
Not everyone read the spending as a warning. At least 13 brokerages raised their price targets on Meta after the results, according to data compiled by LSEG and cited by Reuters, and the advertising business underneath the spending kept growing. Ad impressions rose 10 percent and the average price per ad rose 14 percent, Briefing.com reported, while the number of people using Meta's apps each day reached 3.64 billion.
A separate legal blow had landed hours before the earnings report. Reuters reported that a New Mexico judge ordered Meta to pay a $25 billion penalty in a data privacy case linked to Cambridge Analytica, and that the company said it plans to appeal.
The drop at semiconductor equipment maker Lam Research was bigger. Lam Research posted revenue of $8.22 billion for the quarter ended in September, up 54 percent from a year earlier and above market expectations. Even so, its shares fell 8.36 percent in premarket trading. The company guided revenue for the next quarter to around $8.6 billion, a picture in which the growth rate slows to below 5 percent after accelerating for three straight quarters. Management said the share of revenue from customers in China had fallen noticeably and that parts supply constraints were also in play. IBM shares fell more than 5 percent in premarket trading as well.
The anxiety was confirmed first in Asian markets. The Kospi, which carries a heavy weight of memory chip stocks, closed down 3.67 percent on the day, and Samsung Electronics and SK hynix both fell. Securities firms in South Korea cited concern over the cost of artificial intelligence investment after Meta's results as one of the factors behind the decline.
Fear over artificial intelligence spending is nothing new. For several quarters, the market has repeated the same question of how long it will take for the astronomical sums big technology companies are pouring into data centers and chips to come back as actual revenue. There have been several occasions when, even with good results, shares reacted first when spending plans grew faster than earnings.
Ben Barringer, head of technology research at British asset manager Quilter Cheviot, told Dow Jones that the problem was that expectations for the quarter were quite high, and that for the shares to move, results were needed that completely surpassed expectations.
Tesla offered the mirror image on the same morning. The electric vehicle maker cut its full-year capital spending guidance to about $20 billion, and its shares fell as well. The Wall Street Journal reported that investors treated the slower spending as a possible sign the artificial intelligence build-out is losing pace. Spending more and spending less were both punished.
The market's next destination is already set. Alphabet and Microsoft report results next week. The scale of artificial intelligence spending at both companies is likely to sit at the center of their announcements, and the market is expected this time, too, to unfold the spending plans before the revenue figures.
