Zuckerberg’s AI surge rattles investors at Meta

Meta Platforms Inc., led by Mark Zuckerberg, is embarking on a bold strategic shift towards significant investments in artificial intelligence (AI) and futuristic technologies. Despite Zuckerberg’s call for investor patience, the market reacted with alarm as Meta revealed plans to spend billions more than expected on AI development. This pivot underscores Meta’s commitment to leveraging AI for user growth and advertising success, despite short-term financial adjustments and investor concerns.

Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.

By Kurt Wagner

Mark Zuckerberg is asking investors for patience again. Instead, they’re alarmed.

After Meta Platforms Inc. revealed that it will spend billions of dollars more than expected this year — fueled by investments in artificial intelligence — the company’s chief executive officer did his best to soothe Wall Street. But the spending forecast, coupled with slower sales growth than anticipated, sent the shares tumbling as much as 15% in premarket trading on Thursday.

It was a familiar pitch for Zuckerberg, who has said before that the company’s futuristic technological bets will eventually pay off — and that savvy shareholders should stick around.

“Smart investors see that the product is scaling and that there is a clear monetizable opportunity there even before the revenue materializes,” he said during a conference call following Meta’s first-quarter earnings report.

The strategic pivot may have caught investors by surprise because it had embraced aggressive cost-cutting in recent quarters to boost profit. Its stock had been up 39% so far this year at market close and was trading near all-time highs for the past month.

Read more: Magnus Heystek: From R15m to R115m in a decade; what got me going offshore

The premarket losses set the stock up for the biggest intraday decline since October 2022. A 15% drop would wipe about $185 billion from the company’s market value.

The company credits AI for some of its recent user growth and advertising success, pointing to improvements within its recommendation algorithms. Meta has been one of the best-performing stocks among its Big Tech peers.

The Facebook parent is now plowing ever more resources into artificial intelligence, which requires significant investments in computing power — part of an arms race with rivals from Alphabet Inc. to Microsoft Corp. for supremacy in this fast-developing technology. Zuckerberg warned that the investments would increase “meaningfully” and take a long time to generate returns for the social networking company — perhaps years — but urged them to see the long-term benefits that AI has to offer.

Zuckerberg took a similar tack when Meta pivoted toward building the so-called metaverse and other futuristic technologies, like VR headsets and smart glasses. Those endeavors have been pricey. Reality Labs, the division inside Meta that is spearheading these efforts, lost $16 billion in 2023. But Zuckerberg says that advancements the group has made in the past year — especially its success with its AI chatbot and Ray-Ban smart glasses — has given him confidence that further investment is necessary.

“We’ve gotten more optimistic and ambitious on AI,” Zuckerberg said. “We’re at a place where we’ve shown that we can build leading models and be the leading AI company in the world. And that opens up a lot of additional opportunities beyond just ones that are the most obvious ones for us.”

Read more: BHP’s ‘unbundle’ demands on bid for Anglo is an indictment on SA economy – Piet Viljoen

Achieving that vision will be expensive. 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 midrange 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. Profit that more than doubled to $12.4 billion.

“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, said 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. It was an effort to placate investors frustrated by the company’s aggressive spending on technologies that have yet to fully pay off.

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.

Read more: McKinsey under criminal investigation for role in opioid epidemic

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, she 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 in 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.