Meta Q2 Earnings Preview: Revenue May Top $60 Billion as $100 Billion AI Capex Is the Biggest Test

TradingKey - After the market close on July 29, Eastern Time, Meta Platforms ( META) will announce its second-quarter 2026 financial results. Following market volatility triggered by Alphabet's substantial upward revision of its capital expenditure guidance, Meta has become one of the most watched companies in this tech earnings season.

Although its advertising business continues to maintain industry-leading growth, investor focus has shifted from revenue growth to capital efficiency, with free cash flow and AI return on investment becoming the core variables determining stock price performance.

As of this Monday, Meta's stock price stood at $593.87, retreating about 25% from its 52-week high, and down nearly 9% year-to-date.

Source: Google Finance

Revenue Set to Maintain High Growth as Ad Business Remains Main Strength

According to market consensus estimates compiled by FactSet, Meta's second-quarter revenue is expected to be approximately $60.2 billion, representing a year-over-year increase of about 27%, while adjusted earnings per share (EPS) are projected at $7.13, roughly flat or even down slightly year-over-year.

Some institutions hold a more optimistic outlook. Bank of America expects Meta's revenue for the quarter to be approximately $60.6 billion, with an EPS of around $7.50, while Deutsche Bank projects revenue of about $60.5 billion, both exceeding the market consensus.

In terms of business segments, advertising remains the absolute core. The market expects advertising revenue of approximately $59.0 billion, up more than 26% year-over-year; Family of Apps revenue is projected to approach $59.6 billion, while Reality Labs revenue is expected to be around $440 million, which, despite maintaining growth, still makes a limited overall contribution.

The combination of sustained revenue growth and limited margin improvement reflects the reality Meta currently faces: while the advertising business continues to generate massive cash flows, expanding investments in AI are eroding profit margins.

Meanwhile, the market is also focused on another symbolic data point. Morgan Stanley previously estimated that Meta's second-quarter advertising revenue could exceed Google's search advertising revenue for the first time. If this prediction is realized, it would signify a new shift in the global digital advertising competitive landscape.

The growth of Meta's advertising revenue does not rely solely on traffic expansion. Last quarter, the company's advertising business maintained its high-growth trajectory, with ad impressions increasing by 19% year-over-year and the average price per ad rising by 12%, achieving growth in both volume and price, which drove Family of Apps advertising revenue to $55.0 billion, a 33% year-over-year increase.

Entering the second quarter, channel checks by multiple institutions continue to maintain an optimistic outlook.

Deutsche Bank ( DB) stated that feedback from advertisers generally indicates that the conversion rates and return on investment (ROI) delivered by Meta's advertising system continue to improve. The core driving force behind this is the upgrade of AI algorithms, with continuous enhancements in capabilities such as ad ranking, content recommendation, automated delivery, and creative generation.

Currently, Meta's Advantage+ automated advertising suite has become one of its fastest-growing products. According to statistics, approximately 82% of advertisers are utilizing Advantage+-related tools, and the annualized revenue of value optimization products has surpassed $20 billion, doubling from a year ago. Meanwhile, the overall annualized revenue of the Advantage+ product suite has reached approximately $60 billion.

Wells Fargo ( WFC) expects that the advertising business will maintain growth of approximately 27% in the second quarter, and projects that the third-quarter revenue guidance is likely to fall between $60.5 billion and $63.5 billion.

$100 Billion Capital Expenditures Become Market’s Biggest Test

In April this year, the company raised its full-year 2026 capital expenditure guidance from $115 billion–$135 billion to $125 billion–$145 billion, primarily due to rising hardware costs such as servers and memory, as well as the continuous expansion of AI data centers.

The market expects Meta's second-quarter capital expenditures to be approximately $33.7 billion, nearly doubling year-over-year.

However, several institutions believe that this figure still has room for further upward revision.

Bank of America ( BAC) expects that the company has the opportunity to further raise its full-year capital expenditure ceiling to $150 billion; Wells Fargo, meanwhile, raised its 2027 capital expenditure forecast from $170 billion to $181 billion. JPMorgan even expects that Meta's capital expenditures in 2027 could exceed $200 billion, potentially causing its free cash flow to turn negative for a period of time in the future.

What the market is truly concerned about is not Meta's investment in AI, but whether the growth rate of capital expenditures has outpaced the improvement in profitability.

Source: Bloomberg

As Meta continues to build data centers and procure GPUs and networking equipment, the company is gradually transitioning from an asset-light internet platform to an asset-heavy AI infrastructure operator. Meanwhile, the pressure on its free cash flow is becoming increasingly apparent.

FactSet expects that Meta's free cash flow for the second quarter may see a negative value of approximately $1 billion; institutions forecast that the company's full-year free cash flow for 2026 may only be about $1.8 billion, shrinking significantly from over $43 billion in the previous year.

Wedbush believes that whether Meta's free cash flow will remain under pressure in the coming years will largely depend on the pace of capital expenditure expansion.

However, the company's management has previously emphasized that if future returns on investment fall short of expectations, the company still retains the flexibility to adjust the pace of AI investments and control spending.

Redburn Bullish on Meta to $1,000

Although Meta's stock price has undergone a correction over the past few months, its appeal remains from a valuation perspective. Currently, the company's forward P/E ratio is about 18 times, significantly lower than Alphabet's level of approximately 25 times, still offering a degree of value among mega-cap tech stocks.

Wall Street as a whole remains optimistic. Currently, more than 90% of analysts give Meta a "Buy" or "Overweight" rating, with a consensus target price of about $835, which still offers significant upside from its current share price. Redburn has even set a target price of $1,000, making it one of the most optimistic institutions in the market.

The institution believes that Meta's AI strategy is shifting further from improving content recommendation and ad delivery efficiency toward business tools targeted at small enterprises. In the future, small and medium-sized enterprises may only need to input simple instructions to leverage Meta's AI for tasks such as ad creative generation, shop setup, customer management, and marketing distribution. This will help Meta translate its massive AI investment into new revenue streams while enhancing the appeal of its advertising ecosystem to merchants.

Source: MarketBeat