Mark Zuckerberg defends Meta’s AI spending spree as shares tumble

Get free access to the Editor's Digest

Every week, Roula Khalaf, who works as the editor of the Financial Times, chooses her preferred articles to feature in her newsletter.

In his recent announcement, Mark Zuckerberg sparked concerns among investors as they worried about his ability to manage costs at Meta. This comes after his commitment to investing more and transforming the social media company into the top artificial intelligence (AI) firm globally. As a result, the company's stocks dropped by about 12% in early trading on Thursday.

According to the latest earnings report from Meta, the corporation that operates Facebook, Instagram, and WhatsApp, revenue for the first quarter of 2024 grew by 27% to reach $36.5 billion. This figure exceeded analyst estimates by a small margin, with predictions averaging $36.2 billion.

However, Meta also increased the upper limit of its projected yearly expenses on capital from $37 billion to $40 billion to ensure that they can keep speeding up their infrastructure investments for their plans regarding artificial intelligence (AI). In the previous year, their spending on capital expenditure amounted to $28.1 billion.

The company stated that it anticipates an increase in its capital expenditures for the upcoming year. In addition, it revised its projected costs for the entire year of 2024, now forecasting a lower end of $96bn instead of $94bn. For the current quarter, the company estimates its revenue to be within the range of $36.5bn-$39bn, which is different from the general agreement of $38.3bn.

During the previous year, the head of Meta made efforts to satisfy the financial expectations of Wall Street despite the challenging economic circumstances. These efforts included reducing employment positions, decreasing expenses, and designating 2023 as a period of optimization.

Zuckerberg is feeling the heat to compete in the rapidly advancing AI industry against other tech companies in Silicon Valley, such as OpenAI, Microsoft, and Alphabet's Google. To meet his plans, he's having to invest a considerable amount in the pricey technology and infrastructure. Microsoft and Alphabet are anticipated to provide updates on their own AI initiatives during earnings reports on Thursday.

During a conversation with analysts, Zuckerberg expressed his belief that Meta must allocate a greater amount of resources towards the development of extensively advanced models and worldwide AI services in the upcoming years. He stated that the financial investment in this area needs to grow substantially prior to generating substantial revenue from new products.

The decrease in value of Meta's shares resulted in the loss of huge amounts of money from its overall market value. This is a significant change of direction for a stock that had previously increased in value by over 40% this year. It had managed to remain in a successful position ever since the impressive announcement of its fourth-quarter earnings in February, where it declared a dividend for the first time, demonstrating an impressive turnaround from a previous lull in advertising. Unfortunately, the downward trend on Thursday meant that the shares have only managed to retain around 25% of their year-to-date earnings.

Meta has been working hard to incorporate AI technology into its products. One way it is doing this is by introducing chatbots onto its social media platforms to increase user engagement and improve advertising features. Meta is also aiming to enhance the accuracy of its feeds. Recently, Meta launched a new version of its chatbot AI system called Llama 3. This updated version has significantly increased capabilities, including the ability to reason. Additionally, Meta has introduced a new generation of its AI chips.

During a call with investors on Wednesday, Zuckerberg spoke at the beginning of the meeting while the stocks continued to decline. He tried to reassure investors about the company's expenses, emphasizing its successful record of monetization.

According to him, Meta could generate income by expanding its business messaging service, incorporating ads in the user exchanges with AI chatbots, and demanding fees from groups who want to utilize more comprehensive AI models.

In different words, Zuckerberg mentioned that Meta will keep funding his long-term vision of creating a metaverse filled with avatars. He will concentrate on building "wearable AI," which refers to smart glasses that come with an AI assistant.

Meta's virtual and augmented reality division, known as Reality Labs, suffered losses of $3.85 billion in the first quarter, a figure similar to the previous year. Meta affirmed that they anticipate a substantial climb in their operating losses compared to previous years.

Forrester Research director Mike Proulx mentioned that Mark Zuckerberg's recent announcement is similar to something he said in the past about the metaverse, which didn't turn out that great. However, this time is different because artificial intelligence (AI) has practical and significant applications.

The inquiry lingers on whether Meta can compete in the field of artificial intelligence while upholding a robust financial state. Anticipate a shift of more "metaverse" resources from Reality Labs to Meta's AI campaigns to achieve this goal, he included.