Meta's AI infrastructure spending is climbing, but Morgan Stanley sees four underappreciated revenue drivers that could boost future earnings even as investors worry about shrinking margins and heavy capital outlays
Meta Platforms' latest quarterly results have reignited debate over whether the company's massive artificial intelligence investments will ultimately pay off. While Meta's core advertising business remains robust, the company's capital expenditures are soaring, and investors are questioning if new revenue streams can justify the scale of spending.
AI Spending Outpaces Rivals
Meta reported second-quarter revenue of $60.8 billion, up 28% from a year earlier, with advertising revenue climbing 27% to $59.36 billion. Yet the company's capital expenditures are outpacing even other tech giants. Meta now expects to spend $130 billion to $145 billion on capital projects in 2026, up from a previous lower bound of $125 billion. For comparison, Amazon has raised its 2026 capital spending forecast to $220 billion, and Microsoft expects to invest around $190 billion. But Meta's challenge is distinct: while Amazon and Microsoft can monetize their cloud infrastructure directly, Meta must prove its AI investments can generate new, sustainable revenue streams beyond its core social platforms.
During the first half of 2026, Meta's capital spending exceeded $50 billion. The company's free cash flow for the second quarter dropped sharply to $784 million, down from $12.39 billion a year earlier, as infrastructure investments consumed most of its operating cash. Operating income fell 8% to $18.78 billion, and net income declined 14% to $15.85 billion. The operating margin narrowed to 31% from 43% a year ago, reflecting the pressure from rising costs.
Four Potential Earnings Drivers
Morgan Stanley analysts argue that investors may be overlooking four emerging profit engines that could help offset Meta's heavy AI spending. The firm estimates these opportunities could collectively add more than $9 per share to Meta's 2028 earnings, roughly a 25% boost over its current base forecast. The largest of these is the potential for Meta to sell excess computing capacity as a "neocloud" service to outside companies, which could add nearly $3 per share. Other drivers include Meta AI search, paid subscriptions, and API revenue, each with the potential to contribute meaningfully to future profits.
Some of these revenue streams are already materializing. Meta's Family of Apps revenue outside advertising reached $1 billion for the first time in the quarter, up 73% year-over-year, driven by growth in paid messaging and subscriptions. The company also plans to begin charging businesses for its Business Agent product later in 2026, with more than 1 million businesses already using the service weekly. Morgan Stanley maintains an Overweight rating on Meta and a $775 price target, implying about 32% upside from the July 29 closing price of $585.61.
Advertising Remains the Foundation
Despite the focus on new ventures, Meta's advertising business continues to deliver. Ad impressions across Meta's Family of Apps rose 14%, and the average price per ad increased 12%. Instagram now boasts 2 billion daily active users, Threads has surpassed 500 million monthly users, and Facebook remains above 2 billion daily users. Meta projects third-quarter revenue between $61 billion and $64 billion, with the upper end representing about 26% year-over-year growth, excluding currency effects. Morgan Stanley credits Meta's use of large language models for improving content recommendations and ad targeting, which could further strengthen engagement and monetization.
Meta's ability to generate strong cash flow from its advertising platforms is critical for funding its AI expansion. Yet, as infrastructure spending accelerates, the company's margins and free cash flow are under pressure, raising questions about how quickly new revenue streams can scale to offset these costs.
Risks and Uncertainties
Morgan Stanley's bullish outlook depends on Meta successfully converting its AI investments into higher engagement, better ad performance, and new business lines. But the risks are significant. Slower user growth, weaker demand for Reels, softer advertising markets, or tighter regulation could all weigh on results. The biggest unknown is whether Meta's infrastructure buildout will deliver sufficient returns. If the company misjudges its data center needs or faces delays in monetizing new products, long-term capital requirements could rise further, squeezing profits and cash flow.
Meta acknowledges it remains constrained by available computing capacity and expects to find productive uses for new infrastructure coming online in 2026 and 2027. Yet the company has less visibility into its needs beyond 2028, leaving investors to weigh the potential upside of new AI-powered products against the risk of overbuilding.
For investors tracking the broader AI race, it's worth noting that other chipmakers and cloud providers are also betting heavily on infrastructure. For example, AMD's recent shift toward powering real-world AI applications highlights how competition and capital intensity are reshaping the sector's profit dynamics.
According to reporting by TheStreet, Meta's stock is down 16% year-to-date, reflecting investor caution about the company's ability to turn heavy AI spending into sustainable earnings growth. Morgan Stanley's latest analysis suggests that while the risks are real, the market may be underestimating the value of Meta's emerging business lines.
Understanding how companies like Meta allocate capital for AI infrastructure is crucial for investors evaluating long-term growth prospects. Unlike traditional capital expenditures, investments in AI and data centers can take years to yield returns, and the payoff depends on both technological advances and the company's ability to monetize new products. Investors should consider not only the scale of spending but also the timing and likelihood of future revenue streams when assessing the risks and opportunities in the sector.
