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

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Mark Zuckerberg rekindled investor fears that he would not control costs at Meta after vowing to increase spending and turn the social media group into “the leading AI company in the world”, sending its shares tumbling more than 15 per cent after-hours on Wednesday.

Meta’s earnings release showed revenues at the company — whose platforms include Facebook, Instagram and WhatsApp — had risen 27 per cent to $36.5bn in the first three months of 2024, just above analysts’ expectations of $36.2bn.

But Meta also raised the high end of its full-year capital expenditure guidance from $37bn to $40bn in order to “continue to accelerate our infrastructure investments to support our artificial intelligence (AI) road map”. Last year capital expenditure spending totalled $28.1bn.

It added it expected capital expenditures to continue to rise next year, and also raised the lower range of its 2024 full-year expenses guidance, from $94bn to $96bn. It has forecast revenues for the current quarter in the range of $36.5bn-$39bn, versus consensus estimates of $38.3bn.

Last year, the chief executive of Meta sought to keep Wall Street happy against a backdrop of tough macroeconomic conditions, slashing jobs, cutting costs and labelling 2023 a “year of efficiency”.

However, Zuckerberg is increasingly under pressure to keep pace in the fast-moving AI race with Silicon Valley groups such as OpenAI, Microsoft and Alphabet’s Google, which has forced him to boost investment in the costly technology and infrastructure required to support his plans. Microsoft and Alphabet are expected to deliver updates on their own AI efforts in earnings reports on Thursday.

Zuckerberg said on a call with analysts that he believed Meta “should invest significantly more over the coming years to build even more advanced models and the largest scale AI services in the world”. This spending would have to grow “meaningfully before we make much revenue from some of these new products”, he added.

The after-hours fall in Meta’s shares wiped billions of dollars off its market value. It is a sharp reversal for a stock that had risen more than 40 per cent this year, having been in record territory since a bumper fourth-quarter earnings announcement in February during which it announced its first dividend and signalled a strong recovery from a recent advertising slump.

As part of its efforts to develop and integrate AI tools into its products, Meta has focused on introducing chatbots to its social media apps to boost engagement, as well as features for advertisers, and improving the targeting of its feeds. This month it released a new version of the AI model behind its chatbots, Llama 3, which it said had vastly improved capabilities, including the ability to reason. Meta also unveiled a new generation of its AI custom-made chips.

In his opening remarks to investors on Wednesday’s earnings call, during which the shares continued to slide, Zuckerberg attempted to assuage investor fears over the spending by pointing to the company’s “strong track record” of monetisation.

To bring in revenue, Meta could scale business messaging, introduce advertising into user interactions with AI chatbots, and charge groups to use its bigger AI models, he said.

Zuckerberg also said Meta would continue to invest in his longer-term ambitions to build an avatar-filled metaverse, focusing on developing what he dubbed “wearable AI” — smart glasses with an embedded AI assistant.

Reality Labs, Meta’s virtual and augmented reality arm, posted losses of $3.85bn in the first quarter, about the same as the previous year, with the company adding it continued to expect operating losses to “increase meaningfully” year-over-year.

“Mark Zuckerberg’s ‘heads-up’ was reminiscent of what he once said about the metaverse. That didn’t exactly go so well, but this is different than Meta’s metaverse gamble because AI has real and practical use cases now,” said Forrester research director Mike Proulx.

“The question remains whether Meta can contend in the AI race while maintaining a strong financial position. To do this, expect to see more ‘metaverse’ resources diverted from Reality Labs to Meta’s AI initiatives,” he added.