Meta Splits: The Buyback Machine Shifts to Reverse

Meta (NASDAQ:META) reported record third-quarter revenue of $64.60 billion, up 26% and decently above the $63 billion consensus. Diluted EPS of $3.83 was nearly quadruple the $1.05 they earned a year ago. Bear in mind, EPS was distorted by the $18 billion teen mental health settlement.

Without that charge, EPS would have been $7.40. While the revenue and earnings growth were outstanding, the more interesting number is cash-related. Capital expenditures, largely for AI development, reached $34.91 billion in the quarter, exceeding cash earned from operations. As a result, free cash flow turned negative (-$2.12 billion). Additionally, it significantly raised full-year capex guidance to $135-$145 billion from $85.8 billion. Simply put, their old advertising-related business model can no longer fully fund the AI buildout.

To bridge this cash gap, Meta is splitting its stock. A stock split doesn’t raise money for the company, but in this case it creates the ability to raise funds later. Meta is creating a new class of nonvoting Class C stock, distributed as a dividend of one share for each share held. Essentially, the split will double the share count, halve the stock price, and produce the economic effect of a two-for-one split. Trading in Class C shares is slated to begin in late January 2027.

CEO Mark Zuckerberg stated the purpose directly:

Creating a publicly traded nonvoting stock “usable for, you know, capital raising employee compensation acquisitions, other general corporate purposes while preserving the voting power of existing class A and B shareholders.”

Meta just guided to an additional $60 billion in capital spending, despite negative cash flow. At the same time, the split and new Class C shares created a funding mechanism for acquisitions and capital raises without surrendering any voting control for Mark Zuckerberg. Below is a section describing how the clever issuance of the new Class C shares keeps Mark Zuckerberg’s voting power intact.

For much broader consideration: Might Meta be signaling that the large megacap companies that for years were buying back shares due to a lack of investment ideas are now doing the opposite, issuing shares to fund AI development? We will have more on this in Monday’s Commentary.

Meta’s Class C SharesPreserve Zuckerberg’s Vote

Most media coverage frames the split as a way to reduce the high share price ($680), making the stock more accessible to retail investors. As we quoted in the opening, Zuckerberg described it differently on the call, saying the purpose was creating a publicly traded nonvoting stock “usable” to fund the company’s burgeoning capital needs. Simply, Class C shares will be a funding mechanism for Meta

The “split” with the distribution of new shares changes nothing. Every shareholder receives shares pro rata, and their relative ownership of the company doesn’t change. What changes is that, after the split, Meta will issue new Class C shares to fund their capital demands.

To appreciate why they introduced a new class of shares, let’s describe the current Class A and B shares. Meta’s current dual-class structure gives Class A shareholders one vote and Class B holders ten. Mark Zuckerberg’s control of Meta currently rests on his Class B holdings, of which he holds 99.8% of B shares, as shown below. Therefore, while he owns only 13% of Meta shares, he controls about 61% of the vote. Under the old arrangement, issuing voting Class A shares to meet its capital needs would dilute his voting percentage. With Class C available, Meta can issue nonvoting equity and his voting share majority does not change.

It’s worth noting that Google did something similar in 2014 for the same stated reasons, and as a result, Google settled a shareholder suit for roughly $522 million.

Tweet of the Day

Original Post