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Meta stock sinks as Zuckerberg doles out tough love around AI - it's going to take a long time to turn a profit

Stuart Lauchlan Profile picture for user slauchlan April 25, 2024
Summary:
Meta is going to be spending even more on AI this year and beyond and that's not going to be showing up on the bottom line any time soon.

Mark Zuckerberg

Yet more evidence of Wall Street’s short-termist thinking as Meta’s stock took a pummelling yesterday after CEO Mark Zuckerberg warned investors that while spending on AI was going to ramp up, it would be many years for such ventures to turn a profit. Add to that the ongoing money pit that is the Metaverse program - $3.8 billion operating loss so far this year - and $120 billion was wiped off the company’s value pretty fast. 

Meta turned in Q1 revenue of $36.46 billion, up 27% year-on-year, and more than doubled profit, but the firm also raised its projected CapEx spend to around $40 billion for this year, with the prospect of that being even higher in 2025. But Zuckerberg, who has clung on to his Metaverse vision at the cost of billions of dollars on very little to date, is doubling down on the firm’s AI push as well: 

The initial rollout of Meta AI is going well. Tens of millions of people have already tried it. The feedback is very positive and when I first checked in with our teams, the majority of feedback we were getting was people asking us to release Meta AI for them wherever they are. So we've started launching Meta AI in some English speaking countries and we'll roll out in more languages and countries over the coming months.

Perhaps anticipating Wall Street’s negativity, Zuckerberg pointed out that the approach to AI is a familiar playbook for the firm: 

As we're scaling CapEx and energy expenses for AI, we'll continue focusing on operating the rest of our company efficiently but realistically. Even with shifting many of our existing resources to focus on AI, we'll still grow our investment envelope meaningfully before we make much revenue from some of these new products.

I think it's worth calling that out that we've historically seen a lot of volatility in our stock during this phase of our product playbook where we're investing in scaling a new product, but aren't yet monetizing it. We saw this with reels, stories as newsfeed transitioned to mobile and more and I also expect to see a multi-year investment cycle before we fully scaled Meta AI, business AIs and more into the profitable services I expect as well.

Historically, investing to build these new scaled experiences in our apps has been a very good long-term investment for us and for investors who have stuck with us and the initial signs are quite positive here too. But building the leading AI will also be a larger undertaking than the other experiences we've added to our apps and this is likely going to take several years.

Be smart

Smart investors, he added, will stay the course: 

You enter this period where I think kind of smart investors see that the product is scaling and that there's a clear monetizable opportunity there, even before the revenue materializes. I think we've seen that with Reels and with Stories and with the shift to mobile and all these things where basically we build out the inventory first for a period of time and then we monetize it. And during that time when it's scaling, sometimes it's not just the case that we're not making money from that thing, it can often actually be the case that it displaces other revenue from other things. So like you saw with Reels, it scaled and there was a period where it was not profitable for us as it was scaling before it became profitable.

He added that there are already benefits accruing from using AI internally at Meta: 

AI is already helping us improve app engagement, which naturally leads to seeing more ads and improving ads directly to deliver more value. So if the technology and products evolve in the way that we hope, each of those will unlock massive amounts of value for people and business for us over time.

We are seeing good progress on some of these efforts already. Right now, about 30% of the posts on Facebook feed are delivered by our AI recommendation system. That's up 2x over the last couple of years and for the first time ever, more than 50% of the content that people see on Instagram is now AI recommended.

AI has also been a huge part of how we create value for advertisers by showing people more relevant ads. And if you look at our two end-to-end AI powered tools, Advantage+ shopping and Advantage+ app campaigns, revenue flowing through those has more than doubled since last year.

He concluded:

I think the opportunity is really big. On top of that, I think what we've shown now is that we have the ability to build leading models in our company. So I think it makes sense to go for it and we're going to and I think it's going to be a really good long-term investment. 

My take

I think our optimism and ambition have just grown quite a bit and I think that this is just going to end up being quite an important set of products for us. It was already going to be. Now I think it has the potential to be even more important.

Maybe, maybe not - it will all play out over time. And given the nature of Facebook’s internal ownership, Zuckerberg has the luxury of sticking to his guns. While we’ve questioned his ‘Captain Ahab’ mindset when it comes to the Metaverse, the potential for the AI business is clearly within more reasonable reach.

In other words, what he squared up with to Wall Street yesterday were uncomfortable ideas, but he was quite correct. While the AI hype cycle remains ridiculously out of control as a whole, 2024 is shaping up to be a year of ‘tough love’ from certain quarters when it comes to grounding the over-excitement and coming to terms with practical realities. Hold the line. 

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