Meta’s rating outlook cut to negative by S&P on AI spending

[NEW YORK] S&P Global Ratings took an early step towards potentially downgrading Meta Platforms’s credit rating within the next two years, amid growing pressure on the tech company’s balance sheet stemming from elevated spending tied to artificial intelligence.

S&P lowered the outlook on Meta’s AA- credit grade to negative on Friday (Oct 30), according to a statement. The company’s rising leverage, a measure of debt relative to earnings, was also a key factor in the decision, the rating firm said.

“Meta’s ability to monetise 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 exceeds 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 scrutinise 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 per cent, briefly crossing the threshold of a technical correction on Friday, weighed down by disappointing tech earnings.

“We respectfully disagree with S&P’s assertion about Meta’s AI monetisation capabilities,” company spokesperson Kamran Mumtaz said in a statement. “We see significant product and business opportunities ahead of us, supporting our very strong credit profile.”

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 US$140 billion this year, and accelerate to more than US$225 billion in 2027. The tech giant’s leverage could climb above one time as soon as next year, up from about 0.1 times last year, S&P said in the statement.

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Earlier this month, Meta disclosed that it has more than US$800 billion in future spending commitments, with almost half tied to leases that haven’t yet begun yet, largely for data centres 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.

CEO 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. BLOOMBERG