Meta to issue new class of shares as it tightens AI spending forecast

Oct 21 (Reuters) - Meta raised the lower end of its annual spending forecast on Wednesday and said it would introduce new non-voting shares, in a move that would help fund its costly AI expansion.

Shares of the company rose more than 4% in extended trading, as it also forecast fourth-quarter revenue above Wall Street estimates.

The Facebook and Instagram parent has been pouring money into advanced chips and data centers to compete more aggressively with OpenAI and Anthropic, eroding its historically strong free cash flow.

Meta will issue a new class of non-voting Class C common stock in January 2027, effectively resulting in a two-for-one split, to fund acquisitions and retain top talent while maintaining CEO Mark Zuckerberg's control amid Silicon Valley's intensifying AI race.

The company now expects capital expenditure to be between $135 billion and $145 billion this year, up from $130 billion to $145 billion expected previously.

The company reported better-than-expected revenue of $64.60 billion for the quarter ended September 30, ahead of Wall Street estimates of $63.37 billion, according to data compiled by LSEG.

The company projected fourth-quarter revenue between $73 billion and $76 billion, above estimates of $73.73 billion.

Meta reported a free cash flow deficit of $2.12 billion in the third quarter, compared with positive free cash flow of $10.63 billion a year earlier.

"Our investments are paying off, the core business is strong, and we're seeing velocity across the board," Zuckerberg said in a statement.

The early popularity of its consumer-focused AI agent Muse and the release of a competitive new series of AI models have helped Meta justify those investments to investors, even though some enterprises are restricting the agent's access over security concerns.

Legal challenges are also mounting, including a $25 billion penalty ordered by a judge in New Mexico earlier on Wednesday after a jury found Meta misled the state's residents about ​how it shared user data with third parties and enforced policies on hate speech and misinformation in a case related to British political consulting firm Cambridge Analytica.

In August, Meta agreed to pay as much as $18 billion over a decade and restrict teenagers' use of Facebook and Instagram to settle claims by nearly all US states alleging that Meta's platforms were designed to addict children.

The $25 billion penalty is a "stark reminder of the current legal challenges Meta faces, which will continue into next year," Emarketer senior analyst Minda Smiley said. "Questions and concerns related to privacy and safety will only ramp up should AI agents become more mainstream, which could ultimately hurt Meta considering its reputation in this area."

Meta posted diluted earnings per share of $3.83 in the quarter, a figure that would have been $7.40, had it not been for a $9.89 billion charge related to the August settlement.

The agreement removed a significant regulatory hurdle that had weighed on Meta's stock and allowed the company to avoid a potentially lengthy trial that could have exposed more internal documents about its treatment of young users.

Almost all of Meta's revenue comes from advertising, with Reels competing with TikTok and YouTube Shorts for dominance in the short-video market and Threads taking on Elon Musk's X, while its AI sharpens ad targeting and recommendations to boost user engagement.

(Reporting by Jaspreet Singh in Bengaluru; Editing by Diti Pujara and Nia Williams)