Meta shares fell more than 8% on Thursday after investors reacted negatively to another increase in the technology giant's forecast for investment in artificial intelligence and its plans to issue a new class of shares to finance the large-scale spending.
The sell-off comes despite better-than-expected quarterly results and a solid business outlook for the company. The market reaction shows growing concerns about the cost of the global race in artificial intelligence, which is causing technology companies to invest tens and hundreds of billions of dollars in data centers, chips and other infrastructure.
The worries are now spreading to credit markets. The price of Meta’s debt default insurance hit an all-time high. The company’s five-year credit default swaps (CDS) traded at a record 114.79 basis points.
The massive investments also led to the first negative free cash flow for the owner of Facebook, Instagram and WhatsApp in more than a decade.
Up to $145 billion in investments
Meta raised the lower end of its annual capital expenditure forecast by $5 billion. The company now expects the investment to be between $135 billion and $145 billion.
Among the main directions for these funds is Meta's ambitious plan to put the AI agent Muse at the center of its artificial intelligence strategy.
To help finance this strategy, the company plans to create a new class of non-voting shares - Class C. According to Meta, through their issuance, hundreds of billions of dollars can be attracted over the next few years for investments in AI, acquisitions and employee compensation. The first issues could begin as early as this year.
The use of new shares will allow Meta to limit the need for additional debt financing, which could negatively impact the company's credit rating.
Investors fear the debt race to AI
Meta is not the only company under pressure due to its huge investments in artificial intelligence. Investors are already selling shares of cloud computing companies such as CoreWeave and Nebius, which are investing in data centers at a rate many times higher than their revenues to meet growing demand.
According to experts, increasing debt makes AI-related companies more vulnerable to a possible sharp decline in demand.
An additional risk is the rapid technological obsolescence of expensive AI processors. Chips can depreciate significantly over five to six years, forcing companies to periodically make new large-scale investments to remain competitive.
Not all analysts, however, see the credit market movement as evidence of Meta’s deteriorating financial condition.
Shay Bolur, chief market strategist at Futurum Equities, said the widening of CDS spreads may have more to do with banks wanting to hedge their exposure to Meta’s huge funding of its AI infrastructure than with any real risk of the company defaulting.
By the end of trading on Wednesday, Meta’s shares had risen more than 5% since the beginning of the year. If the more than 8% decline continues, the company is on track to lose about $114 billion in its market capitalization.