Meta Platforms' AI Spending Pressures Stock Performance
Written by Emily J. Thompson, Senior Investment Analyst
Updated: 23 hours ago
0mins
Source: NASDAQ.COM
- Stock Decline: Meta Platforms' shares have fallen nearly 23% since last August, primarily due to management's warning of a significant increase in capital expenditures, with projections of $125 billion to $145 billion for new AI data centers in 2026, raising investor concerns about potential returns.
- Rising Operating Costs: Despite achieving a 33% year-over-year revenue growth in the latest quarter, rising costs associated with AI engineers and infrastructure have outpaced revenue growth, leading to a decline in operating margins since the end of 2024, although the most recent quarter still maintained a robust 41% margin.
- Layoff Plans: To address excessive AI spending, Meta plans to cut about 10% of its workforce, which will create a one-time hit but is expected to save the company billions in operating expenses, thereby improving its financial outlook in the long run.
- Advertising Revenue Potential: Meta is developing AI agents to enhance user engagement and ad targeting, with WhatsApp's business AI facilitating 10 million conversations weekly, and AI-generated video ads driving a 3% increase in ad conversion rates, indicating strong future growth potential in advertising revenue.
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Analyst Views on META
Wall Street analysts forecast META stock price to rise
44 Analyst Rating
37 Buy
6 Hold
1 Sell
Strong Buy
Current: 635.290
Low
655.15
Averages
824.71
High
1117
Current: 635.290
Low
655.15
Averages
824.71
High
1117
About META
Meta Platforms, Inc. is building human connections, powered by artificial intelligence and immersive technologies. The Company's products enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality (VR) and mixed reality (MR) headsets, augmented reality (AR), and wearables. It also helps people discover and learn about what is going on in the world around them, enabling people to share their experiences, ideas, photos, videos, and other content with audiences ranging from their closest family members and friends to the public at large. The Company's segments include Family of Apps (FoA) and Reality Labs (RL). FoA segment includes Facebook, Instagram, Messenger, WhatsApp and Threads. RL segment includes its virtual, augmented, and mixed reality related consumer hardware, software and content. Its product offerings in VR include its Meta Quest devices, as well as software and content available through the Meta Horizon Store.
About the author
Emily J. Thompson
Emily J. Thompson, a Chartered Financial Analyst (CFA) with 12 years in investment research, graduated with honors from the Wharton School. Specializing in industrial and technology stocks, she provides in-depth analysis for Intellectia’s earnings and market brief reports.
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- Cloud Business Potential: CEO Mark Zuckerberg indicated that Meta is considering launching a cloud computing service, with external companies already expressing interest, highlighting strong market demand despite current compute capacity being primarily for internal use.
- Competitive Market Advantage: As one of the four major hyperscalers in the cloud computing sector, a successful launch would position Meta to compete effectively against Amazon, Microsoft, and Alphabet in a rapidly growing market.
- Financial Growth Opportunity: Although Meta plans to spend over $100 billion on capital expenditures this year, its revenue is almost entirely from advertising; launching a cloud service could diversify its revenue streams and enhance long-term profitability.
- Investor Confidence Boost: With a current price-to-earnings ratio of 23 and a reported 33% revenue growth in Q1, the introduction of a cloud computing business could significantly elevate stock prices and attract more investor interest in its growth potential.
See More
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- Earnings Growth Potential: Meta Platforms has attracted over 3.5 billion users through its social media apps like Facebook, Instagram, and WhatsApp, leading to significant earnings growth driven by advertising revenue, which is expected to further enhance shareholder returns.
- AI Strategic Investment: Meta's substantial investments in AI, including building data centers and developing large language models, have been successfully integrated into its social media and advertising processes, likely improving ad effectiveness and increasing revenue while strengthening market competitiveness.
- New Revenue Streams: Meta has announced the rollout of consumer subscription plans that allow users to access special features, while also testing AI subscription services for businesses, which will provide a robust new revenue stream and cater to diverse user needs for future growth.
- Valuation Attractiveness: With a price-to-earnings ratio of 19, Meta is currently the cheapest among the Magnificent Seven, reflecting market caution regarding the monetization of its AI investments; however, as AI products are gradually launched, this could represent a key turning point for the stock.
See More
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- AI Investment Returns: Meta Platforms has heavily invested in AI over the past few years, and while it hasn't yet monetized these investments, the gradual application of AI tools in social media and advertising is expected to drive advertising revenue growth, thereby enhancing overall profitability.
- Large User Base: With over 3.5 billion daily users across Facebook, Instagram, and WhatsApp, Meta's advertising revenue growth is closely tied to user engagement, providing a stable income source and long-term growth potential for the company.
- New Revenue Streams: Meta has announced the rollout of consumer subscription plans that allow users to access special features while testing AI subscription plans for businesses, which will open new revenue channels and further strengthen its market competitiveness.
- Attractive Valuation: Trading at a price-to-earnings ratio of 19, Meta is the cheapest among the Magnificent Seven tech stocks, and despite the challenges of a longer return cycle on AI investments, its potential for growth makes it a focal point for investors.
See More
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- Expanded Monitoring Plan: Meta's Model Capability Initiative (MCI) aims to collect detailed computer usage data from U.S. employees, including mouse movements and clicks, to train AI models for automating software tasks, with the scope exceeding initial descriptions and potentially involving non-U.S. data, complicating privacy compliance.
- Data Usage Controversy: Employees have reported that the MCI tool is causing spikes in home internet usage, with some exhausting their monthly data quotas within days, highlighting the tool's impact on daily life and potentially sparking broader employee dissatisfaction and backlash.
- GDPR Compliance Risks: The MCI project may violate EU GDPR regulations, as even incidental capture of EU employee data could be considered monitoring, requiring Meta to demonstrate the legality and transparency of its data processing to avoid legal repercussions.
- Employee Backlash and Internal Disputes: There is significant internal opposition to the MCI project, with employees labeling it an “Employee Data Extraction Factory” and expressing concerns over data security, fearing that the initiative could lead to comprehensive monitoring of employee behavior, affecting workplace environment and trust.
See More
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- Cloud Service Potential: At the shareholders meeting, Zuckerberg indicated that Meta is considering launching its own cloud computing services, and although not yet implemented, the interest from external companies highlights the market demand for its cloud capabilities.
- Capital Expenditure Plans: Meta plans to invest over $100 billion in capital expenditures in 2023, and while it lacks a cloud computing business, its substantial computing capacity lays the groundwork for future cloud services that could drive profit growth.
- Strong Market Demand: With the surge in demand for cloud computing, if Meta can launch its cloud services in a timely manner, it will help diversify its revenue streams, especially as its advertising revenue growth slows, with cloud computing's high margins providing a new growth avenue.
- Stock Price Upside: Currently, Meta's price-to-earnings ratio stands at just 23, lower than its big tech peers, and if it successfully launches a cloud computing business, it is expected to significantly enhance profitability, thereby driving stock price appreciation.
See More
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- Meta's AI Investments: Meta is pursuing several AI projects, including the development of a superintelligence platform and smart glasses; although its pivot to a metaverse company has not materialized as planned, these investments could drive future growth, especially as its advertising platform saw a 33% year-over-year revenue increase in Q1, indicating successful AI implementation.
- Microsoft's AI Business Growth: In its latest fiscal quarter, Microsoft reported an 18% revenue increase, with its AI business achieving an annual run rate of $37 billion, up 123% year-over-year, while its Azure cloud computing unit also grew by 40%, suggesting strong growth potential amid rising AI demand.
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- Market Concerns Over AI Valuations: While there are concerns about excessively high valuations in the AI sector, the low valuations of Meta and Microsoft, combined with their strong growth prospects, present a stark contrast, suggesting that investors should pay attention to these potential investment opportunities as AI technology continues to evolve.
See More
