Credit Update: META’s capex ramp accelerates, cash flow compresses

We previously initiated coverage on Meta’s bonds earlier this year: Credit Update: META offers 5+% to 6+% yields (USD) while it ramps up its AI monetisation.

Since then, Meta has released its second-quarter results for the period ending 30 June 2026 (Q2FY26). In this article, we examine the group’s latest earnings and provide an updated view on its bonds.

1. Solid topline growth, but AI investment cycle now weighing on margins

• For Q2FY26, Meta delivered a mixed report. Total revenue grew 28% YoY to US$60.8b (compared to Q1FY25: US$47.5b). However, unlike Q1FY26, topline growth did not flow down to profits. Operating income fell 8% YoY to US$18.8b, with operating margins compressing to 31% (Q2FY25: 43%). This margin compression reflects both structural cost inflation from the AI buildout (data centres, cloud, research and development) alongside US$3.6b of one-off charges linked to legal proceedings and severance compensation. Excluding these one-offs, operating income would have risen roughly 9% YoY per management. EBITDA remains decent at US$25.1b. Net income, meanwhile, fell 13.6% YoY to US$15.8b, due to AI buildout costs mentioned above.

• Family of Apps (FoA) remains the key anchor for the group. FoA advertising revenue rose 27.5% YoY to US$59.4b with advertisement impressions up 14% YoY and average price per advertisement up 12% YoY. Encouragingly, non-advertising revenue (WhatsApp + Meta Verified) surged 72.7% YoY to US$1.0b, reinforcing early signs of diversifying monetisation. Family daily active people (DAP) grew 3% YoY to 3.60b (Jun’26), up from 3.56b (Mar’26), while Family average revenue per person (ARPP) rose 23.5% YoY to US$16.86, contributing to operating income of US$23.4b. Overall, we continue to like FoA's performance in both pricing and impressions, and we expect this segment to remain the fulcrum of Meta’s debt-servicing capacity.

• Reality Labs (RL) remains a structural drag. Operating loss of US$4.6b remains broadly consistent with Q2FY25’s loss of US$4.5b; management continues to guide FY26 RL losses at approximately US$19b, in line with FY25. In general, this segment, as highlighted in our previous update, does not impact our credit view on Meta.

• Looking ahead, management raised FY26 total expense guidance to US$165-US$169b from US$162-US$169b previously to incorporate the Q2 legal charge, while narrowing capex guidance to US$130b-US$145b (the upper end was left unchanged). For bondholders, the upper end of the capex range being unchanged could suggest restraint regarding capex spent. Importantly, FY26 operating income is maintained to exceed 2025’s US$83.3b. We note that this implies operating income should pick up over the next two quarters to offset this quarter’s shortfall to meet management’s guidance.     
 

2. Adequate Liquidity with little refinancing risk

• Meta maintains a decent liquidity profile. As of 31 June 2026, the group’s total liquidity profile stood at US$90.3b, of which US$15.5b is held in cash, and the other US$74.8b is in marketable securities maturing over the next twelve months. However, we note that gross debt rose significantly from Q1FY26, up US$25.5b, to US$112.3b as of June 2026; yielding a net debt of US$22.1b, which represents a 4x increase from Q1FY26’s figure of US$5.6b. This pickup is mainly due to the social media giant’s AI infrastructure buildout. That said, long-term debt makes up the bulk (74.5%) of the gross debt figure; as such, we do not expect near-term refinancing risk.

• Operating cash generation remains stellar, with net operating cash flow surging 24.7% YoY to US$31.9b (Q1FY25: US$25.6b). Yet, this strong operational cash generation was mainly consumed by the 82.6% YoY increase in capital expenditure (capex) of US$31.2b, leaving free cash flow (FCF) of merely US$683m (-92.4% YoY). The key takeaway is clear: Meta’s operating cash generation remains solid, but increasing capex spent moving forward will increasingly pressure the group’s FCF. Overall, we maintain our view that FCF over the short-term could be negative.  
 

3. Softer credit profile due to increased capex, accompanied by comfortable interest coverage

• Compared to Q1FY26, Meta’s credit profile has moderated. Leverage metrics such as net debt/equity softened to 8.4% from Q1FY26’s 2.3%. Net debt/TTM EBITDA held flat at 20%, indicating the underlying operating performance of the group remains solid. Interest coverage ratio (TTM EBITDA / TTM interest expense) is robust at 54.1x. This strong coverage ratio provides a substantial buffer for the group’s debt-paying capacity.

• Off-balance-sheet commitments remain our primary credit watch point. Since Q1FY26, lease obligations not yet commenced have increased sharply from US$182.9b to US$279.0b, primarily reflecting additional AI data centres, colocation facilities and network infrastructure. Meta also disclosed a further US$68.0b of long-term data centre leases signed in July 2026, while non-cancellable contractual commitments remained sizeable at US$349.3b as of end-June. Although these obligations are not fully reflected as debt, they reinforce our view that Meta continues to fund a significant portion of its AI infrastructure through long-dated contractual commitments, which should remain a key credit consideration as its AI investment cycle continues.
   

Recommendations

• Overall, we think Meta’s credit profile has softened modestly since our last update, driven by the acceleration in capex and OBS commitments, which should cause a further increase in leverage metrics. Looking ahead, we expect operating cash flows to continue growing at a decent pace, driven by increasing AI integration. We remain mindful of increased capex spending, which would pressure FCF. That said, we do not expect any material worsening, and we remain comfortable with Meta’s credit profile, supported by its essential portfolio of social media applications.

• While META has multiple outstanding USD bonds, we highlight the 2035 issue: META 4.875% 15Nov2035 Corp (USD) trades at a yield to worst of 5.73%, with an expected tenor of 9.30 years. Relative to comparable US Treasuries, this bond offers a decent 70+ bps yield spread. Compared with close technology peers (see Table 1 below), we find decent value in yield pickup of roughly 60+bps compared to higher-rated peers like Google and Microsoft. Do note that Oracle bonds offer a more attractive yield-to-worst, as the company has a softer credit profile than its peers. Investors considering attractive income from a household name, this 2035 Meta bond offers warrant consideration.

• For investors comfortable undertaking duration risk, we highlight META 5.500% 15Nov2045 Corp (USD) that offers a yield-to-worst of 6.67% and a tenor of 19.31 years. This particular issue is available on Bondsupermart Live and can be traded with a minimum order of US$2000 and an incremental lot size of US$1000. However, we stress that given the long tenor, the price of this bond can fluctuate significantly and is best suited for investors looking to trade instead of holding to maturity.

Table 1: Peer Comparison: 

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds GOOGL 4.500% 15May2035 Corp (USD) and the analyst who produced this report hold NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.