Credit risk indicator hits all-time high as AI investment expands

Free cash flow swings to $2.12 billion deficit in Q3

Shares tumble nearly 7% despite 26% revenue growth

Concerns over return on AI investment spread across Big Tech

The Meta logo. [Reuters]
The Meta logo. [Reuters]

The financial strain of massive AI investment is catching up with America's Big Tech giants. Meta, the parent company of Facebook and Instagram, saw its share price tumble nearly 7% despite posting earnings that beat market expectations, as investors grew alarmed over deteriorating cash flow from its heavy AI spending. With free cash flow turning negative for the first time since 2012 and a key credit risk indicator hitting an all-time high, questions are mounting over the sustainability of the AI investment boom.

Meta's five-year credit default swap premium surged to 114.79 basis points (1 bp = 0.01 percentage point) on Thursday (local time), hitting a record high, according to Reuters. The single-day jump of 7.6 bp was the largest since at least 2025. A CDS functions as a form of insurance against the risk that a company defaults on its debt — the higher the premium, the greater the credit risk the market perceives.

The spike in Meta's credit risk indicator reflects AI investment costs that are rising faster than expected. In its third-quarter earnings released Wednesday, Meta raised the lower end of its full-year capital expenditure guidance to between $135 billion and $145 billion, up from a prior range of $130 billion to $145 billion, signaling plans to pour even more money into AI infrastructure such as data centers and advanced semiconductors.

The scale of that spending is already reshaping Meta's cash position. The company's free cash flow swung to a deficit of $2.12 billion in the third quarter, reversing a surplus of $10.63 billion in the same period last year. It was the first time Meta had posted a free cash flow deficit since 2012.

Free cash flow represents the cash a company generates from operations after subtracting capital expenditures. Meta posted a net profit of $9.86 billion in the quarter, but its enormous AI outlays pushed free cash flow into negative territory. The company is not actually running out of cash, however — it held $82.45 billion in cash, cash equivalents and marketable securities as of the end of September.

Even earnings that beat Wall Street forecasts were not enough to calm investor nerves. Meta's third-quarter revenue came in at $64.6 billion, up 26% from a year earlier. Its fourth-quarter revenue guidance of $73 billion to $76 billion also topped market expectations. Yet Wall Street's attention was fixed less on revenue growth than on the enormous costs flowing into AI projects and the uncertain timeline for recouping those investments.

Meta's announcement that it plans to issue a new class of shares also weighed on investor sentiment. The company said it would create non-voting Class C common shares, with issuance set to begin in January next year. The move is designed to raise capital for AI investment, mergers and acquisitions, and talent recruitment while preserving CEO Mark Zuckerberg's control over the company.

Markets, however, raised concerns that future share issuances could dilute the value of existing shareholders' stakes.

"The market is questioning whether the enormous sums being poured into AI are generating the returns that were originally expected," said Steve Sosnick, chief market strategist at Interactive Brokers. On Meta's plan to create non-voting shares, he added that "investors are treating this as a backdoor mechanism that could be used to issue additional shares down the road and dilute existing stakes."

The investment burden was reflected directly in Meta's share price. Meta shares tumbled nearly 7% in New York on Thursday (local time), reversing gains the stock had posted in after-hours trading immediately following the earnings release.

AI-related companies fell in tandem. Nvidia shares dropped about 4% the same day, while AI cloud company CoreWeave slid more than 8%. Selling pressure spread to data center-related firms including Nebius Group, IREN and Applied Digital.

Concerns over the cost of AI investment are spreading beyond Meta to other Big Tech companies. Oracle's five-year CDS premium also approached a record high, while Amazon's CDS premium remained at its highest level since March 2020, according to Reuters.

Oracle and Alphabet each fell more than 2% on Thursday (local time), while Microsoft dropped 1.3% and Amazon declined 3.7%. As selling spread across the technology sector, the NASDAQ Composite fell 2.60% and the S&P 500 declined 1.21%.

In markets, the central question is shifting away from AI's long-term growth potential toward how companies will finance the enormous capital required and when they can expect a return. Companies expanding AI infrastructure through borrowing are particularly exposed in a high-rate environment — if revenue generation takes longer than anticipated, their financial burden could grow significantly.

Not all assessments of AI investment are negative, however. Meta maintains that AI-driven improvements in advertising efficiency and increased user engagement are already contributing to revenue growth. "Our investments are paying off and our core business is strong," CEO Zuckerberg said in the third-quarter earnings call. Meta plans to continue aggressive AI investment next year.


sjy@heraldcorp.com