Meta Faces AI Spending and Legal Costs in Third Quarter

Meta Platforms entered its third-quarter 2026 earnings report facing competing demands from investors: demonstrate commercial progress in artificial intelligence while managing rising infrastructure costs and legal liabilities. The company was scheduled to release results after the market closed on October 21, with analysts focused on advertising performance, adoption of its Muse AI assistant and spending plans for 2027.

Analysts surveyed by LSEG forecast earnings of $5.75 per share and revenue of $63.2 billion. Morningstar estimated revenue could reach approximately $63.8 billion if Meta again delivered results near the upper end of its guidance, as it had in the previous two quarters.

According to StreetAccount, Meta's daily active people across its applications were expected to reach 3.65 billion, nearly unchanged from the previous quarter. Investors were also watching whether advertising growth would reflect a combination of higher prices per advertisement and expansion in the user base.

The Muse AI assistant, launched in September, quickly climbed to the top of Apple's iOS App Store rankings, contributing to renewed investor enthusiasm. Meta also continued releasing AI models and updates, including Muse Wonder, which debuted on October 12.

Investors were expected to seek details about user engagement, future monetization and the computing infrastructure needed to support these products. Meta's extensive reach through Facebook, Instagram, WhatsApp and Messenger gives it access to a large audience for introducing AI-powered services.

Capital expenditure remained another major concern. Meta narrowed its 2026 spending forecast in July to $130 billion to $145 billion, raising the lower end of its previous range by $5 billion, according to its second-quarter earnings announcement.

The financial impact was already evident in cash generation. Meta reported free cash flow of $784 million for the second quarter, down from $8.55 billion in the same period a year earlier. Morningstar estimated spending during each quarter of the second half of 2026 would reach approximately $40 billion to $47 billion, with free cash flow potentially turning negative.

FactSet analysts projected Meta's capital expenditure would climb to $196.3 billion in 2027. Across Meta, Alphabet, Microsoft and Amazon, combined capital spending was expected to reach approximately $730 billion in 2026 and approach $1 trillion the following year, reflecting investment in advanced computing chips and large-scale data centers.

Morningstar placed Meta's fair value estimate at $850 per share and assigned the stock a three-star rating, indicating that it considered the shares fairly valued relative to its estimate. The research firm projected sales would grow at a compound annual rate of 22% over five years, driven primarily by increased average revenue per user and supplemented by user growth.

Morningstar also forecast that Meta could generate $40 billion in revenue from renting excess data center capacity to AI laboratories by 2030, up from a negligible amount in 2026. However, the firm gave Meta a high uncertainty rating because of its substantial AI investments and continued losses in Reality Labs.

Legal expenses presented a separate risk to quarterly earnings. In August, Meta agreed to pay nearly $17 billion to settle a major lawsuit involving state attorneys general, including California's Rob Bonta. The litigation concerned allegations that the company misled the public about child mental health harms associated with design features on Facebook and Instagram, including recommendation algorithms.

Wolfe Research analysts warned that a related $10 billion legal charge could weigh on third-quarter earnings per share because analysts had not incorporated the expense into their forecasts. Meta also continued to face individual personal injury claims and a separate federal case involving school districts over alleged harm to children's well-being from social media applications.

Beyond its legal exposure, Meta's advertising business remained central to its financial outlook. Morningstar identified improved ad targeting, content recommendation systems and continued growth in digital advertising spending as important advantages, while warning that reduced advertising expenditure by Chinese retailers Temu and Shein could weaken revenue growth.

Meta was the first major cloud and technology infrastructure company scheduled to report results during this earnings cycle. Alphabet and Microsoft were due to report on October 28, followed by Amazon on October 29, giving investors additional information about whether the industry's accelerating AI infrastructure spending was generating sufficient commercial returns.