Meta’s shares drop: how do earnings reports influence price?

Facebook owner Meta saw its share price plummet around 9% after it released second quarter results that revealed the high levels of spending on AI were, for the moment, having low levels of payoff.

This has been a repeated pattern among most of the big tech stocks when earnings have been released recently because investor’s focus has shifted from ‘did they grow their sales and profits more than we expected’ to ‘will the AI investments pay off and when?’. And if the market isn’t happy with that answer the share price often takes a hit.

What data are investors getting?

When Meta releases quarterly earnings reports, it also generally provides revenue guidance for the next quarter, giving investors a picture on how the company has performed against expectations as well as its outlook.

In the latest numbers, investors looked past the fact that adjusted earnings came in ahead of consensus forecasts, and instead focused on Meta nudging up its forecast for full year capital expenditures to $135 billion at the midpoint of the range.

Other key numbers amid the AI-hyper fixation from Meta were that it reported its lowest free cash flow ($784 million) for many quarters, which dropped 90% from the $8.6 billion reported a year earlier, as capital expenditures surged 83% and operating costs went up 55%.

What was the outlook?

Meta projected third quarter revenues of between $61 billion and $64 billion compared with analysts’ estimates of $63.2 billion and raised its guidance for operating expenses.

The disappointing outlook combined with concerns over rising AI spending and falling free cash flow were key reasons why the shares dropped.

How did the share price react to previous earnings reports?

As the table shows, investors have historically reacted positively to Meta’s earnings due to solid earnings beats and, importantly, raised guidance, reflecting better than anticipated business momentum.

Meta’s fourth quarter 2025 (reported in January 2026) showed a solid beat, but more importantly, the company projected first quarter revenues of $55 billion, comfortably ahead of analysts’ estimates of $51.4 billion.

The company also set an initial 2026 capital expenditures guidance in a range of $115 billion to $135 billion as it planned to scale AI infrastructure.

At this stage, investors were willing to reward Meta and give it the benefit of the doubt that an adequate return could be made on the AI investments.

But in the first quarter of 2026, Meta reported earnings per share above guidance and market expectations, and raised full-year capital expenditures guidance to $135 billion at the middle of the new range. This time, the spending fears trumped the positive earnings and sent the shares lower.

What lessons can be gleaned?

Investors seem to be more interested in what a company says about the future than whether earnings came in ahead of analysts’ forecasts.

But that doesn’t mean recently reported earnings are completely redundant, because expectations play an important role in determining how share prices react. Stock prices reflect consensus expectations, so when earnings are stronger than expected, it signals underlying business momentum is stronger than analysts’ were anticipating.

The role of rising revisions after earnings beat expectations

When Next reported better-than-expected first quarter sales on 6 March, the retailer edged up its full year profit guidance. The shares responded positively, gaining around 5% on the day.

More importantly, it acted as a trigger for analysts to revise their full year earnings estimates upwards to reflect new company-issued numbers, rather than waiting for the results.

Consensus earnings estimates for the 2027 financial year have since increased by around 2%, while January 2028 numbers have moved up by around 3%.

Upgrades provided a tailwind for the share price which has risen by around 10% compared with a 6% increase in the FTSE 100 index since early March.

This is a good example supporting academic studies which have shown that new information is digested slowly and earnings expectations tend to drift up gradually over time, rather than be instantly priced in.

How does positioning affect share prices?

It is hard to nail down how investors are positioned ahead of an earnings report. If traders believe earnings will surprise to the upside, share prices tend to anticipate these expectations.

This explains why sometimes share prices fall after earnings beat estimates.