After social media giant Meta Platforms, Inc. (ticker: META) released its Q2 results for its Fiscal Year (FY) 2026 on the 29th of July 2026, the stock dipped about 9.6% in after-hours trading, ostensibly due to EPS (earnings per share) miss from consensus expectation. The next session (the 30th) closed with the stock plummeting nearly 8% – the slight buy-in from Asia didn’t shift the overall sentiment in the stock price.

The key stressor seems to be market scepticism regarding rising AI capex without actualizing sustained benefits – which Meta vigorously attempted to address, justify and hedge.

Trend Analysis

Diluted earnings per share (EPS) performance seems to have softened while remaining bullish in the first half (H1) 2026 relative to FY 2025:

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Source: Company Information; Leverage Shares analysis

If trends were to continue, total revenue would be up 16% relative to FY 2025, which is slightly lower than the growth exhibited in the past two FYs. Diluted EPS growth was trending at 38% growth in Q1 2026; this has slightly ramped up to 42% by the end of H1 2025. While Q2 saw the company also registering an 8% shrink in operating income, this becomes a 9% growth after stripping out $2.4 billion in legal charges and $1.2 billion in severance paid out for layoffs. As of H1 2026, operating income is running at par with previous FY.

In the last earnings call, CEO Mark Zuckerberg highlighted the fact that Meta presently is among the biggest investors in the Virtual Reality (VR) space across the industry, which partnerships with both Ray-Ban and Oakley have been instrumental in bringing to the market. Despite all that, the company remains massively dependent on advertising – with Reality Labs actually slipping in revenue share.

Source: Company Information; Leverage Shares analysis

This quarter, Zuckerberg seems to have ramped up the conversation around the company’s dominant segment. He claimed that no larger ad business is growing faster than Meta in dollar terms and this is hard to dispute: as per the company, Advantage+ reached an annual revenue run-rate of $75 billion this quarter, 9 million small businesses are using AI creative tools, the company shows an 8.3% lift in clicks and 15.7% in conversions from AI-supported generative ranking.

However, data center depreciation and operating costs, third-party cloud spend, third-party token costs and aggressive AI hiring are all now running through the income statement and contributing to expenses rising 55% over the previous quarter.

Amidst this sat a very striking remark by Zuckerbeg.

Justifying the Capex Spend

Zuckerberg stated that Meta is receiving offers for compute at a significant premium to what it paid while also arguing that selling intelligence carries higher margins. This sounded like a fallback position seemingly being prepared in defence of its datacenter buildout: if the personal-agent AI segment Meta has aggressively invested in doesn’t rationalize all of the spend, Meta is well-positioned to become or start a cloud/hyperscaler business in order to recoup this massive investment.

A free cash flow of $784 million against $31.9 billion of operating cash flow indicates how deeply embedded capex has become, with Meta taking on an additional $24.9 billion in debt, taking long-term debt to $83.7 billion. Meta has now gone from a company that returned capital to one that raises it, with stock buybacks running zero both this quarter and last versus $26.26 billion in FY2025.

In Q1 2026, Meta had upped its 2026 capital expenditure forecast from the earlier $115-135 billion range to the $125-145 billion range. This quarter, however, the company didn’t provide a final capex estimate for 2027, instead stating that it is geared towards maximizing 2026–27 capacity while maintaining flexibility for years beyond.

The vagueness on future spends – that had been mixed into the earnings call in the previous quarter – seems to have intensified in this quarter.

In Conclusion

For a company dependent on advertising and consumer spending, the rationalization of an alternative income stream from compute infrastructure rentals – despite Zuckerberg claiming that it still sees value in selling intelligence rather than renting compute – didn’t assuage investors: the market is arguably at an all-time high in terms of scrutiny over AI capex spending. It is the right sentiment to have, given that AI’s massively touted benefits by industry leaders: the benefits aren’t materializing into sustainable ROI relative to spending.

If the earnings season of Q1 2026 was a test for AI valuations, then the price trajectories being imputed in Q2 2026 feels like the result. There are ample grounds to suggest that drawdowns might continue – unless Meta were to pull the brakes on spending, which presently seems unlikely. However, course corrections don’t necessarily happen during earnings calls: the management can always have a change of heart if investor sentiment stays sour.

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