Meta Platforms looks like a money-printing machine. So why has it been loading up on billions of dollars in debt to pay for its new data centers?
It turns out that the abundant free cash flow that Meta reports to investors is something of an optical illusion. Yes, it generated billions in cash last year, but that was largely devoured by the all-too-real cash costs that come with paying stock-based compensation to employees. Those included billions of dollars in withholding taxes triggered when employee shares vested, and billions more for share buybacks used to offset share dilution from those same awards.
Viewed this way, it’s easy to see why Meta more than doubled the debt on its balance sheet last year to $58.7 billion. It borrowed because it had to. And that debt is only the part that is visible. Meta’s books don’t include the debt from a $27 billion data-center project under construction that Meta kept off its balance sheet through complex financial engineering.
For investors, this raises a vexing valuation issue. At $1.66 trillion, Meta’s stock-market value already looks expensive at 38 times reported free cash flow for 2025. The ratio becomes stratospheric, exceeding 1,000 times, if free cash flow included the cash costs tied to stock-based pay.
Other big tech companies also report large cash costs tied to stock-based pay, including Alphabet, Microsoft and Nvidia. But as a percentage of free cash flow, such costs are far smaller at those companies than at Meta, which is an outlier.
Free cash flow is an important financial metric. Investors rely on it as a proxy for the discretionary cash a company has left over after reinvesting in its business to reward shareholders or pay down debt.
Yet the term free cash flow has no uniform definition under the accounting rules. It is typically calculated as cash flow from operating activities minus capital expenditures, or capex. And, as Meta’s numbers show, it needs a rethink.
Meta reported $43.6 billion of free cash flow for 2025. That was the result of $115.8 billion of operating cash flow minus $72.2 billion of capex. On paper, Meta’s core business handily covered its gigantic artificial-intelligence infrastructure build-out.
In reality, cash costs directly tied to employee stock awards consumed $42 billion, or 96%, of Meta’s free cash flow last year. A Meta spokesman declined to comment.
Cash withholding taxes related to vested shares were $18.4 billion. In addition, Meta spent an estimated $23.6 billion on share buybacks to offset dilution. While that exact dollar figure isn’t disclosed, it can be derived from Meta’s statement of shareholders’ equity.
Last year Meta issued 63 million new shares of common stock, but withheld 27 million of them to cover employee taxes. That left a net increase of 36 million newly issued shares, meaning that 90% of the total 40 million shares that Meta repurchased were needed just to neutralize the dilution from the employee stock awards.
Stock-based compensation is a noncash expense on the income statement; at Meta last year, it was $20.4 billion. But paying stock awards often requires separate cash outlays that are sizable.
These expenditures, for tax payments and stock buybacks, aren’t included in net income or operating cash flow, and as a result they don’t get counted in free cash flow. Instead they are tucked away in the financing section of the cash-flow statement. However, they are a crucial component in how companies pay their employees.
“If you really want to get the true valuation of the business, you have to adequately reflect all of the operating costs as operating activities. And the way free cash flow is traditionally calculated does not do that,” says Kevin Koharki, an accounting professor at Purdue University. He recommends further adjusting free cash flow to include the cash costs related to stock-based pay. “We can delude ourselves for a while that this is not a real cost, but we’re only fooling ourselves at the end of the day,” he says.
The accounting rules have long had a tough time dealing with such costs because they are a hybrid of sorts. The rules treat the tax payments related to stock awards as financing activities on the cash-flow statement, for instance, even though they also are related to paying employees, which is a core operating activity.
Meta uses what is known as the net settlement method for such taxes, which become due in cash when the shares vest. To satisfy the taxes, the company withholds a certain number of shares from the employee. But instead of selling the shares to raise cash for the tax bill, it pays the taxes from its own coffers.
Likewise, when companies repurchase shares to offset the dilution from stock-based pay, that also is a cost related to paying employees. The buybacks wouldn’t be necessary if the companies paid their employees entirely in cash instead. But the accounting rules treat the buybacks, too, as a financing activity, which keeps them out of free cash flow.
The economic reality is the same: Cash leaves the company.
Meta’s employees and executives captured the bulk of the rewards from last year’s free cash flow. The rest of Meta’s shareholders must now weigh how long the AI building binge can last if Meta can no longer pay for it without continually tapping the debt markets.
Write to Jonathan Weil at jonathan.weil@wsj.com