Meta Platforms (NASDAQ: META) reported stronger-than-expected third-quarter revenue on Wednesday, October 21, as advertising growth continued to support its aggressive artificial intelligence investments. However, a separate $25 billion judgment in New Mexico, elevated infrastructure spending and weakening operating margins have complicated the outlook for Meta stock.
The Facebook and Instagram parent generated $64.60 billion in quarterly revenue, up 26% from a year earlier and above Wall Street estimates of approximately $63.34 billion. Reported earnings reached $3.83 per share, reflecting a $9.89 billion charge related to an earlier settlement over teen mental health and social media.
Meta shares rebounded approximately 2% during Wednesday’s regular session, trading around $708 after falling toward $680 earlier in the week. Early after-hours trading indicated further gains following the earnings announcement.
The company also announced plans to establish a new class of non-voting shares, giving it additional flexibility to finance AI investments while preserving Mark Zuckerberg’s voting control.
Meta Q3 Earnings Beat Revenue Estimates, but Operating Margin Falls
Meta’s third-quarter revenue increased from $51.24 billion to $64.60 billion, supported by a 10% rise in advertising impressions and a 14% increase in average advertising prices.
Advertising generated $63.06 billion, accounting for approximately 97.6% of total revenue. The figures demonstrate that Meta’s traditional advertising operations remain the principal source of income financing its AI expansion.
Family daily active people reached 3.64 billion in September, up 3% year over year, suggesting that revenue growth is increasingly dependent on monetization improvements rather than rapid expansion of the existing user base.
However, total costs and expenses increased 68% to $51.61 billion, while reported operating income declined 37% to $12.99 billion. Operating margin contracted from 40% to 20%.
Much of the deterioration reflected a $9.89 billion legal charge associated with Meta’s August agreement with 52 US state attorneys general. Excluding that charge, operating income would have reached $22.88 billion, approximately 11% higher than a year earlier.
Meta also calculated that diluted earnings per share would have reached $7.40 without the settlement charge, compared with the reported $3.83.
Nevertheless, even after removing the legal expense, the implied operating margin was approximately 35.4%, below the previous year’s 40%. This indicates that underlying costs remain an important issue beyond litigation.
Quarterly capital expenditures reached $34.91 billion, while free cash flow turned negative at $2.12 billion despite operating cash flow of $32.79 billion.
New Mexico Orders Meta to Pay $25 Billion in Separate Privacy Case
Meta’s earnings announcement coincided with another major legal development. On October 21, a New Mexico judge ordered the company to pay $25 billion in civil penalties following a jury verdict finding widespread violations of the state’s Unfair Practices Act.
According to the New Mexico Department of Justice, the jury determined that Facebook committed 43,899,725 violations involving misleading statements about user privacy, third-party data access and content moderation.
The litigation stems from concerns surrounding the Cambridge Analytica scandal. Although the potential statutory penalty approached $219 billion, the court reduced the amount to $25 billion.
Meta disputes the judgment and intends to appeal. The award therefore represents a substantial legal exposure, but it should not automatically be treated as an immediate cash payment or an expense already recognized in the third-quarter results.
Importantly, the New Mexico judgment is separate from the August multistate agreement, which provides for payments of up to approximately $18.59 billion.
The $9.89 billion charge recognized in Q3 relates to that earlier agreement, not the new New Mexico penalty.
The distinction matters because adding both headline amounts directly to quarterly operating expenses would misrepresent Meta’s reported financial position. Future accounting disclosures and the appeals process will determine how the latest judgment affects its financial statements.
Meta Raises AI Spending Floor as Muse Faces OpenAI Competition
Meta narrowed its 2026 capital expenditure guidance to $135 billion-$145 billion, compared with its previous range of $130 billion-$145 billion.
The higher minimum reflects the company’s continued investment in AI infrastructure, including computing capacity, data centers and advanced model development.
Mark Zuckerberg said Meta had reached important milestones with the launch of Muse and Muse Wonder, describing AI investments as increasingly beneficial to its existing business.
The company expects AI-powered recommendations, stronger user engagement and more efficient advertising systems to continue generating incremental revenue. However, it has not disclosed enough financial information to establish the independent profitability of Muse.
Meta’s consumer AI assistant has attracted substantial attention since its September launch, competing with OpenAI’s ChatGPT in consumer AI applications and introducing automated shopping and task-completion capabilities.
As FinanceFeeds previously reported, Muse’s rapid adoption helped support a nearly 13% weekly rally in Meta shares during September. Truist Securities estimated the technology could eventually generate at least $28.5 billion in additional annual revenue by 2030, although that figure is an analyst projection rather than company guidance.
Competition has also exposed commercial limitations. Amazon restricted Muse’s shopping access to its marketplace, demonstrating that autonomous purchasing agents may depend on agreements with retailers and payment providers.
These restrictions raise questions about how effectively Meta can convert AI engagement into transaction revenue, subscriptions and enterprise services.
Meta has not provided a full-year 2027 capital expenditure target. Management nevertheless expects aggressive investment to continue, while forecasting sustained overall revenue growth.
The broader question is whether AI infrastructure spending can deliver returns quickly enough to protect margins and cash flow. FinanceFeeds has examined similar spending pressures at Alphabet, where substantial computing investments are reshaping expectations for advertising and AI profitability.
New Class C Stock and Q4 Guidance Add to Meta’s Investment Outlook
Alongside the earnings release, Meta announced plans to establish a publicly listed, non-voting Class C common stock, effective January 19, 2027, subject to the required corporate steps.
The company intends to distribute one Class C share for each outstanding Class A or Class B share through a special stock dividend. Meta expects its existing Class A share price to reflect an effective two-for-one stock split after the distribution.
The transaction will not change shareholders’ existing voting power. However, the new securities could eventually be used to raise capital, compensate employees or finance acquisitions without issuing additional voting shares.
For investors, the arrangement creates additional financing flexibility while reinforcing Zuckerberg’s control over the company’s strategic direction.
Meta also forecast fourth-quarter revenue of $73 billion-$76 billion, supported by continued advertising demand and AI-related improvements in monetization.
Full-year operating expenses are now expected to reach $175 billion-$179 billion, including the recognized legal settlement charge. The company expects Reality Labs losses of $18 billion-$19 billion in 2026, potentially declining to approximately $15 billion in 2027.
Management’s spending commitments mean investors will increasingly evaluate Meta on its ability to translate revenue growth into operating profit and free cash flow.
As discussed in FinanceFeeds’ recent Meta stock analysis, enthusiasm surrounding Muse has created substantial share-price volatility, with the stock retreating from its September high near $780 before the latest earnings rebound.
The immediate priorities are now clearer: delivering the projected fourth-quarter revenue, establishing a more detailed 2027 investment outlook, improving cash generation and assessing the potential financial impact of the New Mexico judgment.
Meta’s advertising business continues to grow at an impressive rate, but its investment case increasingly depends on whether the next phase of AI expansion can generate sufficient returns to offset higher infrastructure spending and legal liabilities.
