Meta's stock sags under the weight of aggressive AI spending
Meta Platforms Inc. said it will spend billions of dollars more than it previously anticipated this year as it continues to invest in artificial intelligence, raising questions about whether the company’s futuristic technological bets will eventually pay off for investors. The shares tumbled in extended trading.
The Facebook parent is plowing ever more resources into artificial intelligence, which requires significant investments in computing power, while locked in an arms race with rivals from Alphabet Inc. to Microsoft Corp. for supremacy in this fast-developing technology. The Menlo Park, California-based company raised its estimates for costs for the year, and now believes capital expenditures will be $35 billion to $40 billion. Earlier, it estimated expenses related to things like servers, AI hardware and data centers would be $30 billion to $37 billion.
“We expect capital expenditures will continue to increase next year as we invest aggressively to support our ambitious AI research and product development efforts,” Chief Financial Officer Susan Li said in a statement, referring to 2025.
At the same time, the social networking company also projected second quarter sales of $36.5 billion to $39 billion, with the mid-range of that forecast less than analysts’ average estimate.
Those metrics overshadowed what was otherwise a solid first quarter, with revenue of $36.5 billion, an increase of more than 27% over the same period a year ago. And profit that more than doubled to $12.4 billion.
The shares dropped as much as 19% in after-hours trading. The stock had been up 39% so far this year at market close and has been trading near all-time highs for the past month, in part reflecting excitement around AI. Meta was one of the best-performing stocks among its Big Tech peers.
“For all Meta’s bold AI plans, it can’t afford to take its eye off the nucleus of the business –- its core advertising activities,” Sophie Lund-Yates, an analyst at Hargreaves Lansdown, wrote in a note on Wednesday. “That doesn’t mean ignoring AI, but it does mean that spending needs to be targeted and in-line with a clear strategic view.”
In the previous quarter, Meta announced a $50 billion stock buyback in addition to the company’s first-ever quarterly dividend, an effort to placate investors frustrated by the company’s aggressive spending on technologies that have yet to fully pay off. Chief Executive Officer Mark Zuckerberg has spent years plowing money into efforts to build the so-called Metaverse, a virtual world where he hopes people will one day play and work.
Reality Labs, the Meta division focused on its futuristic bets, reported a loss of $3.85 billion for the first quarter, roughly the same as a year ago. That division, which also oversees VR headsets and Meta’s Ray-Ban smart glasses, reported an annual loss of more than $16 billion in 2023.
But in recent months, Zuckerberg has made AI a priority, refocusing Meta on the technology after OpenAI released its ChatGPT chatbot in 2022, sparking a frenzy of competition and development among the big tech companies. Meta has started inserting AI into every facet of the business, from Instagram and Facebook to its smart glasses.
The company announced plans for a new $800 million data center in January, and is also developing its own chips for artificial intelligence services. Meta is also working on several new iterations of its large language model, known as Llama, for powering chatbots and other AI services.
On a call with investors, Zuckerberg said Meta will invest “significantly” in AI-related projects. He said these investments will increase “meaningfully” before Meta sees any significant revenue from many of these new endeavors. “Smart investors” will see the long-term possibilities of this work will outweigh the short term costs, Zuckerberg said.
The company reiterated its broader 2024 spending plans, saying it will shell out $96 billion to $99 billion for the calendar year, up slightly from a low-end target of $94 billion to $99 billion. It previously said that much of that would go toward infrastructure costs in addition to long-term bets on augmented and virtual reality.
Meta’s mixed report comes on the same day that President Joe Biden signed a bill into law that would force TikTok’s parent company, ByteDance Ltd., to sell the popular video service or face a ban in the US. The potential elimination of a major competitor could give a boost to Meta’s advertising business since its short-video offering Reels is a clone of TikTok.
Reels now makes up about 50% of the time that people spend on Instagram, Li said on a call with analysts. When asked specifically about the TikTok legislation, Li said it was too soon for the company to understand the potential impact.
Meta has had a turbulent past few years, with a Covid-era bump in users and activity on the platform during lockdowns followed by a subsequent pullback in advertising in 2022. Meta also gorged on hiring when times were good, leading to some 10,000 job cuts 2023, a period Zuckerberg dubbed the “year of efficiency.”
Those painful moves paved the way for the significant increase in profit the company is seeing now. First-quarter revenue was the highest ever in that period. More people are also returning to Meta’s products.
Zuckerberg said the Threads app, similar to the former Twitter and launched last July, now has more than 150 million monthly active users — including Taylor Swift.
