San Francisco Frontiers - Meta beats expectations but legal penalties hit profit amid AI race

The company reported $9.86 billion in profits from July to September, almost 50 percent below investor expectations, which Meta said was dragged down by a $9.9 billion charge related to the settlement.

Meta reported its earnings just hours after another financial penalty was announced related to a case in New Mexico.

A judge ruled that Meta must pay $25 billion to New Mexico after a jury found last month that the social media giant had deceived users in a case related to the Cambridge Analytica scandal.

"We continue to monitor active legal and regulatory matters that could significantly impact our business and financial results," CFO Susan Li said Wednesday afternoon on a call with analysts.

Meta still faces "a number of youth-related trials scheduled in the coming months in the United States," Li continued.

Meta shares jumped as high as 7 percent.

-AI frenzy-

The company has been spending aggressively to build out its artificial intelligence (AI) capabilities, and investors are looking for signs that the investments are paying off.

"We expect that the (profits and losses) of Reality Labs to improve from here ... and trending towards profitability," CEO Mark Zuckerberg said on the call.

Reality Labs is the company's hardware division which is developing devices like AI-powered glasses.

In September, Meta unveiled several new AI wearables including an audio-only, camera-free version of its smart glasses, amid global concerns about privacy and the filming of women and girls without their consent.

Its AI model known as Muse will be "the centerpiece of our vision" for wearables, Zuckerberg said in September at the company's annual Meta Connect conference.

Smart glasses let wearers take photos, film videos, listen to music, make phone calls, translate text or interact with an AI assistant.

During Connnect, Meta also announced the Muse Charm, a tamagotchi-like AI device that will allow users to interact with their Muse agent, a type of autonomous AI assistant, separately from a smartphone.

"We're about to ship Muse Charm, which will have gone from concept to a hardware device in people's pockets in less than a year," Zuckerberg said Wednesday.

And 10 million people already use its Muse model in the US and Canada, the company said.

But AI models consume large amounts of computing, which has sparked an industry-wide race to build out new data centers around the world.

Meta said it spent $35 billion on capital expenditures -- which include buying property and equipment -- in the September quarter, below investor expectations of $41 billion.

The company has spent over $85 billion so far this year, it said in an investor document.

In July the company had increased its spending estimate for the whole year to $145 billion, up from $130 billion, which is nearly double what it spent in 2025.

-Raising cash-

Meta also announced that it would issue a new class of stock, though the new shares would not have voting rights, which will allow it to raise more money for its ambitious AI roadmap.

It might also be leverage to encourage its founder and chief executive to stay in California.

In a securities filing, Meta expressed concern that Zuckerberg's voting power "could drop to approximately 53 percent or lower" if he has to sell a significant portion of his shares to pay increased taxes.

That is a possibility due to a controversial tax on billionaire wealth, Proposition 40, that could pass in California this November.

Existing shareholders will be given one new Class C stock for every share they already own -- meaning Zuckerberg will also gain new shares and could eventually sell them to pay the new tax without diluting his voting power.

K.Gray--SFF