Meta's AI spending has cost its rating? S&P downgrades AA- credit outlook to Negative as ‘ability to monetize limited’
Livemint( with inputs from Bloomberg)
S&P Global Ratings on Friday downgraded Meta's AA- credit rating to Negative, in an “early step” amid growing pressure from the tech giant's increased artificial intelligence (AI) related expenditures, Bloomberg reported.
S&P in a statement said the AI spending related strain on Meta's balance sheet and rising leverage (earnings relative to debt) were key factors that led to the decision, it added.
“Meta’s ability to monetize its AI investments is more limited than that of its peers,” S&P said, adding that it’s not clear when its expenditures will start producing material revenue that exceed the rising costs. The outlook “reflects uncertainty around how long capex will remain elevated and free operating cash flow will be negative.”
The decision signals S&P could downgrade the company within the next couple years, but also means the bond grader isn’t actively considering downgrading Meta now. It comes as investors scrutinize Meta’s and other industry players’ ability to generate tangible returns from the massive investments they’ve been plowing into the AI buildout. The Nasdaq 100 fell 3.5%, briefly crossing the threshold of a technical correction on Friday, weighed down by disappointing tech earnings.
Meta spokespersoj Kamran Mumtaz said the company does not agree with S&P's evaluation.
“We respectfully disagree with S&P’s assertion about Meta’s AI monetization capabilities. We see significant product and business opportunities ahead of us, supporting our very strong credit profile,” Mumtaz stated.
- Meta’s current AA- credit rating is the fourth-highest investment-grade score, and a one-notch downgrade would still leave it solidly in high-grade territory.
- Still, the company has been borrowing heavily to fund its ambitions. S&P forecasts Meta’s capex will reach $140 billion this year, and accelerate to more than $225 billion in 2027. The tech giant’s leverage could climb above 1.0 times as soon as next year, up from about 0.1 times last year, S&P said in the statement.
- Earlier this month, Meta disclosed that it has more than $800 billion in future spending commitments, with almost half tied to leases that haven’t yet begun yet, largely for data centers and energy infrastructure. Despite some hesitancy from Wall Street, which has pressed Meta on how it aims to make a return on its AI investments, company executives have doubled down on the need for future spending.
- “We expect to continue investing aggressively to support both our core business and emerging AI initiatives,” Chief Financial Officer Susan Li said during an earnings call with analysts.
- Meta has made headway with its technology in recent months, particularly with its Muse models and personal AI agent. Chief Executive Officer Mark Zuckerberg and other leaders have outlined several ways the company could make money from these products, including through subscriptions, transaction fees, and potentially even by incorporating advertising, which already generates the vast majority of the company’s revenue via apps like Instagram, Facebook and WhatsApp.
- The company is also developing plans for a cloud business, which could include selling access to various AI models hosted on Meta’s existing AI infrastructure or selling access to “raw” computing capacity.
(With inputs from Bloomberg)
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