Meta splits stock with nonvoting shares to fund AI push

Meta Platforms reported stronger-than-expected third-quarter earnings and announced a two-for-one stock split through nonvoting Class C shares, a move designed to raise capital without diluting Mark Zuckerberg’s voting control. The company’s shares rose about 2% in after-hours trading following the news, reflecting investor relief at the revenue beat but also setting the stage for a prolonged period of heavy investment in artificial intelligence.

For the quarter ended September 30, Meta posted diluted earnings per share of $3.83, up from $1.05 a year earlier, on revenue of $64.60 billion, a 26% year-over-year increase. The results exceeded analyst expectations of $3.56 per share on $63.3 billion in revenue. However, the earnings absorbed a $9.89 billion charge related to a settlement with 52 attorneys general over teen mental health litigation, with potential payments reaching $18.59 billion. Excluding that charge, earnings would have been $7.40 per share. The company’s profitability declined as spending surged, with expenses rising sharply compared to the previous year.

Advertising remained the core revenue driver, accounting for $63.06 billion, with average ad prices climbing 14% on 10% more impressions. Daily active users across Meta’s apps averaged 3.64 billion in September, up 3%. Capital expenditures reached $34.91 billion, exceeding the $32.79 billion in cash generated by operations, resulting in negative free cash flow of $2.12 billion. Headcount fell 15% year-over-year to 66,775, following job cuts in May.

Zuckerberg framed the spending as a long-term bet on AI, highlighting the rapid adoption of Meta’s Muse personal agent and Muse Wonder model. More than 10 million users in the U.S. and Canada signed up for Muse in about six weeks, though the service’s compute intensity has delayed a global rollout. Zuckerberg told analysts the company expects to improve Muse’s cost efficiency significantly over the next year, though Chief Financial Officer Susan Li cautioned that expanding the user base would require "significant investment."

The stock split will take effect on January 19, 2027, through a dividend of one new Class C share for each outstanding Class A and Class B share. Unlike traditional splits, these shares carry no voting rights, a structure Meta says will allow it to raise capital, compensate employees, and fund acquisitions without diluting Zuckerberg’s control. His voting power remains at about 60.6%, despite holding only a 13.4% economic stake. The move follows an agreement that restricts Zuckerberg’s ability to sell Class C shares without also selling or converting voting shares, ensuring his control persists even if he reduces his economic interest.

If passed, the tax could cost Zuckerberg billions, though the company’s filing suggests he had considered leaving the state before the agreement.

Meta’s fourth-quarter revenue guidance of $73 billion to $76 billion aligns with analyst expectations, but the company narrowed its full-year capital expenditure range to $135 billion to $145 billion. The company’s virtual and augmented reality unit is expected to see reduced losses next year, with investment shifting toward AI. Meta provided no revenue forecast for 2027, underscoring the uncertainty around its AI-driven spending spree.

The nonvoting share structure is unusual for a public company but has been used before by other tech firms to preserve founder control while raising capital. For Meta, the move reflects a bet that investors will tolerate near-term margin compression in exchange for long-term growth. The question is whether the strategy will pay off before competitors gain ground or investor patience wanes.

Meta’s focus on AI infrastructure suggests a shift in priorities, though the company continues to invest in other areas as well. The timeline for profitability remains unclear, given the scale of spending and negative free cash flow. For now, the stock split and nonvoting shares offer a way to fund Zuckerberg’s vision without ceding control. But the real test will be whether Meta’s investments deliver returns before cash reserves or investor confidence run low.

Sources: siliconangle.com