S&P Downgrades Meta's Rating Outlook to Negative on AI Spending Pressure
S&P Global Ratings downgraded the outlook on Meta's AA- credit rating from stable to negative on October 31, citing continued increases in AI-related spending and rising leverage. S&P expects Meta's capital expenditure to reach $140 billion this year and exceed $225 billion in 2027, with leverage rising above 1x as early as next year, and said Meta's ability to convert AI investment into commercial revenue is relatively limited. A Meta spokesperson said the company disagrees with this assessment and believes future product and business opportunities are sufficient to support its credit profile.
Why read this
AI score 56
S&P provided the specific basis for the outlook downgrade, including capital expenditure and leverage ratio forecasts, which can be used to observe how the market views the return cycle on AI investment.
Topics
Body · AI translation
On October 31, S&P Global Ratings took the first step toward a possible downgrade of Meta's credit rating. Over the next two years, Meta's credit rating could face downward pressure. The reason is that the tech company's ever-increasing AI-related spending is putting growing pressure on its balance sheet.
According to a statement released by S&P on Friday, S&P lowered the outlook on Meta's current AA- credit rating from "stable" to "negative." The rating agency said Meta's rising leverage—that is, the ratio of debt to earnings—was also an important reason for the adjustment.
"Compared with peers, Meta's ability to convert AI investments into commercial revenue is relatively limited," S&P said, adding that it is still unclear when such spending will begin generating sufficiently substantial revenue to exceed growing costs.
S&P noted that the revision of the rating outlook to negative reflects market uncertainty over two issues: first, how long Meta's capital expenditures will remain elevated; and second, how long its negative free operating cash flow will persist.
This adjustment means S&P may downgrade Meta's credit rating in the coming years, but it also means the rating agency has not yet formally initiated a downgrade review process for Meta.
The decision comes as investors closely scrutinize the ability of Meta and other tech giants to earn returns on their AI investments. These companies have poured enormous sums into AI infrastructure construction, but the market is increasingly focused on whether these investments can actually translate into tangible returns. Dragged down by poor earnings performance from tech companies, the Nasdaq 100 plunged 3% on Friday, at one point falling below the threshold for a technical correction.
Meta spokesperson Kamran Mumtaz said in a statement: "We respect S&P's opinion, but we disagree with its judgment on Meta's AI commercialization capability. We believe there are enormous development opportunities in products and commercial businesses in the future, and these opportunities are sufficient to support our very strong credit profile."
Meta's current AA- credit rating is the fourth-highest level among investment-grade ratings. Even if downgraded by one notch in the future, its credit rating would still be firmly within the high-grade investment-grade range.
However, in order to achieve its AI development ambitions, Meta has been borrowing heavily.
S&P expects Meta's capital expenditures to reach $140 billion this year and to accelerate further to more than $225 billion in 2027.
In its statement, S&P said Meta's leverage could rise above 1x as early as next year, compared with only about 0.1x last year.
Earlier this month, Meta disclosed that its future spending commitments had exceeded $800 billion, nearly half of which is related to lease contracts that have not yet formally begun performance, mainly for data centers and energy infrastructure construction.
Although Wall Street has shown a certain degree of concern and has repeatedly pressed Meta on how exactly it plans to earn returns from its AI investments, Meta management remains firm that further increases in investment are necessary in the future.
Meta Chief Financial Officer Susan Li told analysts on the earnings call: "We expect to continue to pursue an aggressive investment strategy to support core business development and the advancement of emerging AI businesses."
In recent months, Meta has made some progress in AI technology, especially in the Muse model and personal AI agents.
Chief Executive Officer Mark Zuckerberg and other company executives have proposed a variety of commercialization and monetization methods, including subscription services, transaction fees, and possibly even introducing advertising into these products.
At present, advertising has already contributed the vast majority of Meta's revenue through apps such as Instagram, Facebook and WhatsApp.
In addition, Meta is also formulating plans to develop a cloud computing business. This may include two models: first, selling customers access to various AI models deployed on Meta's existing AI infrastructure; second, directly selling underlying raw computing power resources to customers.
(Source: China Fund News) Mid-body embedded advertisement