Meta Platforms' plan to invest an additional $10 billion to expand its AI budget has raised concerns among investors.
$Meta Platforms (META.US)$ is significantly increasing its investment in the artificial intelligence sector, striving to catch up with$Amazon (AMZN.US)$and Alphabet ( $Alphabet-C (GOOG.US)$ , $Alphabet-A (GOOGL.US)$ ), aiming to capture a larger share of the rapidly expanding and highly profitable AI market. However, the company's announcement of an additional $10 billion investment to expand its AI budget has raised concerns among investors, despite strong first-quarter results, causing the stock to drop more than 10% during Thursday's trading session.
Market observers noted that Meta's increased capital expenditure is primarily aimed at addressing rising costs related to computing power, chip components, and data centers. However, compared with cloud service providers, the return on its AI investments follows a more complex and uncertain path.
Justin Post, an analyst at Bank of America Securities, stated that the scale of this AI investment cycle has exceeded expectations, but the return prospects are less clear compared to cloud vendors.
Ken Gawrelski, an analyst at Wells Fargo & Co, pointed out that Meta's advertising business maintained robust growth in the first half of the year, buying the company some time to validate returns on new computing power investments. However, as Google and Amazon offer more direct pathways to monetize AI, market patience is gradually wearing thin.
Due to the pressure on free cash flow caused by rising capital expenditures, JPMorgan analyst Doug Anmuth downgraded Meta's rating from 'Overweight' to 'Hold'.
He indicated that the stock price may remain under pressure for some time, with investors looking for clearer paths on how AI-driven products and the Muse model can generate additional revenue beyond the advertising business.
Anmuth added that it will take time to achieve sustainable returns from AI investments, as the company needs to go through the full cycle of product development, iteration, scaling, and commercialization.
During the earnings call, Meta CEO Zuckerberg emphasized that the company is highly focused on improving investment efficiency but acknowledged that a clear roadmap for the monthly expansion of every product has yet to be established. He mentioned that the company has formed a general understanding of its future direction and believes that the current product and model quality are progressing toward the goal of becoming a 'global leading AI lab.'
Brad Erickson, an analyst at Royal Bank of Canada Capital Markets, noted that as AI development accelerates and internal application scenarios expand, computing power is becoming increasingly critical. Meta had consistently underestimated its computing power requirements in the past.
He believes that once the company moves past the current high-investment phase, future profitability could achieve compound annual growth of 15% to 20%.
Although short-term stock performance has been pressured by increased AI spending, Wall Street remains optimistic overall. According to Seeking ALPHA data, analysts widely rate Meta as a 'Strong Buy'.
Editor/Rocky