S&P cuts Meta’s outlook to negative

S&P Global Ratings has taken an early step toward potentially downgrading Meta Platforms Inc’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 (AI).

S&P on Friday lowered the outlook on Meta’s “AA-” credit grade to negative, it said in 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.

The Meta logo is displayed on a computer screen on Oct. 19.

Photo: Reuters

“Meta’s ability to monetize its AI investments is more limited than that of its peers,” S&P said, adding that it is not clear when its expenditures would 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,” it said.

The decision signals S&P could downgrade the company within the next couple years, but also means the bond grader is not 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 have been plowing into the AI buildout.

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

Meta’s “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 forecast Meta’s capital expenditure would reach US$140 billion this year, and accelerate to more than US$225 billion next year.

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.

Last month, Meta disclosed that it has more than US$800 billion in future spending commitments, with almost half tied to leases that have not 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,” Meta chief financial officer Susan Li said during an earnings call with analysts on Oct. 21.

Overall, the five largest players in the data center race — Meta, Alphabet Inc, Microsoft Corp, Amazon.com Inc and Oracle Corp — have committed more than US$3 trillion in spending over the coming years, pointing to massive ongoing investment in AI infrastructure. That is a mix of short-term spending and some pledges that are as long as decades away.