Meta Platforms Eyes $65 Billion Investment in AI: A Bold Move or Risky Gamble?
In recent years, businesses from various industries have shown a growing interest in artificial intelligence (AI) technologies. Graphics processing units (GPUs) have gained popularity due to their ability to power complex AI training programs, such as large language models.
Despite this surge in investment, expectations of a peak might seem reasonable. Investors typically seek a return on substantial infrastructure spending.
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However, the appetite for AI funding remains strong amongst some major players. Notably, Meta Platforms (NASDAQ: META) announced plans for its capital expenditures (capex) to reach $65 billion in 2025, reflecting an increase of over 60% from the previous year. A significant portion of this budget will focus on AI infrastructure development.
In the following sections, we will explore what Meta’s ambitious $65 billion plan entails and revisit the outcomes of its previous significant spending initiatives. Historical insights may provide indications of how Meta’s stock might perform this year.
Understanding Meta’s $65 Billion Capex Initiative
During its fourth-quarter earnings call on January 29, Meta’s leadership faced a barrage of inquiries about this year’s capex strategy. CEO Mark Zuckerberg and CFO Susan Li offered comprehensive details about the upcoming multibillion-dollar project.
Li specified that the spending will focus on three key areas: servers, data centers, and networking equipment. This aligns with Meta’s plans to expand its network of data centers, which will be outfitted with “large training clusters.” She highlighted the aim to further adopt Meta’s custom-built Training and Inference Accelerator chips, developed alongside Broadcom.
Such a level of investment is typical for leading tech firms. Still, it’s worth reflecting on what transpired the last time the company engaged in aggressive spending.
Image source: Getty Images.
Meta’s Historical Spending Spree: Lessons Learned
Quick question: When was the last time you heard about the metaverse?
A few years back, discussions surrounding virtual worlds and spatial computing dominated the financial landscape. The metaverse was expected to revolutionize interaction and inspire remarkable advancements in product development across industries.
No company embraced the metaverse concept quite like Meta Platforms. Until October 2021, the company was known as Facebook. In 2022, Meta began heavily investing in its Reality Labs division, which focused on virtual reality technology for gaming and entertainment.
Data by YCharts.
The chart illustrates a dramatic rise in Meta’s capex. While this increase alone isn’t alarming, it significantly affected the company’s profitability. Notably, there was a stark contrast between rising capex and falling earnings per share in 2022.
Consequently, this downturn led investors to lose confidence in Meta, resulting in a 64% drop in its stock value that year.
Reasons This Time Might Be Different
Though one might draw parallels between Meta’s investments in the metaverse and its current AI spending plan, several factors suggest a different outcome this time.
Firstly, 2022 was challenging for tech companies overall. Inflation peaked near 9%, prompting the Federal Reserve to increase interest rates, which tightened budgets across the board.
This environment affected Meta’s primary business as advertising revenues dipped by 1% in 2022. Coupled with the costs of metaverse initiatives, the company saw its earnings per share fall by 38% that same year.
Another differentiator for the AI spending plan is how Meta plans to allocate funds. Unlike the overhiring seen in Reality Labs, which led to subsequent layoffs, management indicated that the AI investments aim to enhance the longevity of its servers. This suggests that the $65 billion could yield a more favorable return on investment.
As 2023 unfolds, it should become evident whether Meta’s capital expenditures are outpacing its revenues and profits. Investors should closely monitor earnings announcements and management updates regarding the AI initiative.
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Randi Zuckerberg, a former director at Facebook and sister to Meta Platforms CEO Mark Zuckerberg, serves on The Motley Fool’s board. Adam Spatacco is invested in Meta Platforms. The Motley Fool holds a position in and recommends Meta Platforms and Broadcom. More details can be found in The Motley Fool’s disclosure policy.
The views expressed in this article are those of the author and do not necessarily reflect the opinions of Nasdaq, Inc.
