Key Points

• S&P downgrades the credit outlook for Meta to negative
• Institutions expect the cash flow gap to reach $71 billion.
• AI expenditure threat Meta highly regarded AA - rating

Meta Platforms It is precisely because artificial intelligence expenditures are under new scrutiny that Standard & Poor's Global Ratings has downgraded the company's credit outlook from stable to negative, warning that its ongoing expansion of infrastructure investments could result in a cash flow gap of $71 billion by 2027.

According to a report by Reuters on October 30, this rating agency questioned whether Meta could obtain sufficient returns from investments in AI, as the company's expenditures on chips, data centers, and computing infrastructure are accelerating.

This decision does not imply an immediate downgrade of the credit rating. Meta currently maintains a AA rating, but Standard & Poor's now believes that the increase in debt and ongoing negative cash flows may ultimately weaken its financial position.

As AI expenditures accelerate, Meta faces a cash flow gap of $71 billion

S&P expects that the free operating cash flow of Meta may deteriorate to -$71 billion by 2027, and the increasing infrastructure expenditures may result in its cash generation capability remaining below zero after 2028.

This forecast was released shortly after the latest financial report of Meta. The financial report indicates that investments in AI have significantly changed the company's financial situation.

According to the official performance data of Meta, revenue in the third quarter increased by 26% year-on-year, reaching $64.6 billion; capital expenditures amounted to $34.91 billion.

Despite strong growth in the advertising business, free cash flow turned negative at $2.12 billion, compared to a positive $1.063 billion a year ago.

Coinpaper has previously analyzed this reversal in cash flow and pointed out that this is also one of the reasons for the significant decline in the stock price after Meta's financial report.

The company currently expects its annual capital expenditures to range between $135 billion and $145 billion, reflecting its ambition to develop advanced AI models and expand its computing power.

S&P is concerned that the growth rate of these investments may continue to outpace the income they generate.

Meta's AA - Credit Ratings Face New Debt Tests

Negative outlooks have drawn more attention to the borrowing and long-term financial commitments of Meta.

The company disclosed that as of the end of September, its long-term debt was approximately $80.92 billion; Standard & Poor's, however, believes that its adjusted leverage ratio could exceed 1.0 times as early as 2027.

This threshold is particularly important because if the free operating cash flow remains negative and the leverage ratio remains above 1.0 for an extended period, it may trigger a downgrade of the current AA rating.

S&P also expects that Meta will rely entirely on debt financing to cover its expected cash shortfall in 2028.

However, the company still possesses considerable financial resources. As of the end of September, the total amount of cash, cash equivalents, and marketable securities amounted to 82.45 billion US dollars.

Meta raised objections to the ratings agencies' judgment, stating that its AI investment will bring significant opportunities for new product development and business growth.

Management also emphasized that the efficiency of ad recommendations and monetization has improved, indicating that AI has begun to benefit its core business.

Nevertheless, the financing concerns regarding Meta reflect a broader industry trend.

Microsoft recently launched a $25 billion bond issuance, and tech companies are increasingly seeking external capital to fund their infrastructure expansion.

Wall Street's concerns about the expenditures of AI have spread beyond Meta.

It's not just Meta that faces doubts about the investment profitability of AI.

Amazon recently announced that despite the accelerated growth of its cloud business revenue, its free cash flow has deteriorated from $14.8 billion positive in the past 12 months to $42.4 billion negative.

Coinpaper's analysis of Amazon highlights the massive infrastructure costs that led to this reversal.

Alphabet also revealed that after capital equipment expenditures exceeded $51 billion, its quarterly free cash flow turned negative, which exacerbated market concerns regarding investment demand in the industry.

Its declining cash flow also contributed to another round of heavy selling in tech stocks.