Meta Stock Took a Dive. It’s the Poster Child for the Debate Over AI Spending.

Meta’s Ray-Ban smart glasses: Meta brought this year’s biggest investment-grade corporate bond deal to market, totaling some $30 billion. (Joan Cros / NurPhoto / Getty Images)

All eyes were on the parade of earnings reports from the technology behemoths this past week. But what grabbed the markets’ attention were the implications of their massive capital investments in artificial intelligence on their balance sheets and cash-flow statements.

At the center of this debate was Meta Platforms, which plunged 11% on Thursday after reporting a miss on earnings but, more importantly, said it was pushing full-speed ahead on AI data centers, projecting $71 billion in spending, up from $69 billion previously. Moreover, the company said that capital expenditures “will be notably larger in 2026 than 2025.”

All of which is absorbing increasing amounts of megatechs’ cash flow. As Doug Kass of Seabreeze Partners observes, the so-called hyperscalers have morphed from being “capital light” to capital-intensive operations. In the process, they have had to turn to external financing for their ambitious AI buildouts.

In fact, Meta brought this year’s biggest investment-grade corporate bond deal to market, totaling some $30 billion, the latest in a parade of recent data-center borrowing. Bank of America tallies $75 billion of AI-related public debt offerings in the past two months.

And that doesn’t count other financings, including Meta’s creative off-balance-sheet funding of its Louisiana data center, described by colleague Adam Levine in last week’s Tech Trader column. That includes a $38 billion loan tied to Oracle ’s data centers, on top of $18 billion of public bonds issued by the company, led by world’s second-richest person, Larry Ellison.

Putting numbers to Kass’ point, BofA credit strategists Yuri Seliger and Sohyun Marie Lee write in a client note that capital spending by five of the Magnificent Seven megacap tech companies (Amazon.com , Alphabet , and Microsoft , along with Meta and Oracle) has been growing even faster than their prodigious cash flows. “These companies collectively may be reaching a limit to how much AI capex they are willing to fund purely from cash flows,” they write.

Consensus estimates of AI capex suggest, they calculate, that it will climb to 94% of operating cash flows, minus dividends and share repurchases, in 2025 and 2026, up from 76% in 2024. That’s still less than 100% of cash flows, so they don’t need to borrow to fund spending, “but it’s getting close,” they add.

That leaves no room to return capital to shareholders. The companies could opt to fund AI investments by eliminating share buybacks, which would mean those investments would take the ratio of capex to cash flow back to the low 70% range. Or the companies could take advantage of their stocks’ elevated price/earnings ratios by issuing equity.

Much more expedient, and more favorable from an equity investors’ standpoint, is to continue to issue debt. And that’s especially so while credit-market conditions are so salubrious. According to multiple reports, Meta received over $120 billion of orders for its $30 billion of high-grade (Aa3 by Moody’s, AA- by S&P Global Ratings) bonds on offer, a reflection of massive investor demand for investment-grade corporate bonds.

On that point, Kansas City Federal Reserve Bank President Jeffrey Schmid pointed to easy financial market conditions as one reason for dissenting against the central bank’s decision to lower its federal-funds target a quarter percentage point, to a range of 3.75% to 4%, this past week.

Equity markets near record highs, narrow corporate bond spreads, and robust high-yield bond issuance counter the suggestion that monetary policy is restrictive, he said in a statement on Friday explaining his vote. Meanwhile, inflation has exceeded the Fed’s 2% target for more than four years, he added. (Fed governor Stephen Miran dissented in the opposite direction, preferring a half-point cut, as he had at the September meeting.)

Kass points out that unlike earnings per share, cash flow can’t be manipulated by companies. If they spend more on AI than they generate internally, they have to finance the difference. That’s no problem currently, especially with the credit markets ready, able, and more than willing to fund megatech borrowers. And the future promise from AI may justify today’s spending.

But there is a credit cycle. And tech hadn’t depended on it until now.

Write to Randall W. Forsyth at randall.forsyth@barrons.com