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Unraveling Zuckerberg’s Enormous AI Gamble and Its Implications on META Stock Unraveling Zuckerberg’s Enormous AI Gamble and Its Implications on META Stock

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META stock - Will Zuckerberg’s Massive AI Bet Be a Boom or Bust for META Stock?

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Approximately twelve years ago, Mark Zuckerberg, the CEO of Meta Platforms (NASDAQ:META), astounded the business world by staking Facebook on open source clouds, to great benefit for META stock. Although Facebook was newly public, with a market capitalization of $104 billion, its revenue in the year prior was a mere $3.71 billion, and the operating cash flow barely reached $1 billion. At that time, entering the cloud business cost around $1 billion per quarter. Zuckerberg’s gamble paid off. Fast forward to today, and the same visionary is making a comparable bet—but this time with a revenue of $135 billion in 2023 and a market cap totaling $1.19 trillion. Wall Street is wholeheartedly backing him. Let’s delve into the future of META stock.

META Stock and the Expense of AI

This time, the wager stands at a whopping $37 billion in capital spending for this year alone, on top of a 50 cent/share dividend (costing $5 billion for the year) promised in its last earnings release, and ongoing stock repurchases of up to $50 billion.

What fuels analysts’ confidence in Meta getting it right this time? One reason is Meta’s open source approach to constructing its models. This means it is not bearing the entire cost of AI development as opposed to its rivals, albeit relinquishing full control over the outcomes.

Meta’s confidence is founded on its historic practices; it established the Open Compute Foundation to lower the costs of cloud development by exchanging best practices. At present, the foundation’s board includes members from Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOGL) and Intel (NASDAQ:INTC).

However, this endeavor is somewhat contentious. Rival OpenAI, which commenced as open source, now asserts that AI creation is too crucial to be shared. Meanwhile, Zuckerberg’s declarations appear as audacious as those of OpenAI CEO Sam Altman, who aspired to develop “artificial general intelligence.” The pivotal question is, how can profits be reaped from any of this?

Meta’s AI Business Model

Currently, Meta is not pledging substantial financial results from AI for this year.

Although there are already non-financial outcomes, such as the utilization of AI to rank content on its social media platforms. It has introduced “system cards” advising content developers on best practices. The primary goal is to enhance engagement while filtering out potentially harmful content, like political material.

The aspiration is to enable advertisers to feel secure when purchasing Reels, Instagram, and soon, Threads ads. Enter Advantage+, an array of AI tools tailored specifically for advertisers to automate campaigns.

Similar to Amazon’s (NASDAQ:AMZN) Prime Video, the magnitude of revenue Meta could generate from ads will be determined by the amount it charges users to abstain from them. European regulators are incensed over Meta’s proposition to bill users for opting out of ads and user tracking. However, the price set for this service will communicate its value to analysts.

Thus, while the spotlight is on Meta’s utilization of Facebook and Instagram images to create new images, this is merely a sideshow. It’s akin to a magical illusion. Critics may focus on Meta’s development of user tools, but the real money is raked in through enhanced ad targeting.

The Bottom Line

Many analysts opine that Meta’s AI strategy renders a valuation of nearly 9 times revenue justified. Its strategic investments in AI, augmented reality, and virtual reality (Reality Labs have incurred a loss of $42 billion to date) appear destined to yield fruit.

But will they? Zuckerberg maintains that the ongoing layoffs are unrelated to AI. He contends that the older technologies were simply “overbuilt.”

This explanation strains credibility. Even bullish investors perceive Meta as presently fully valued. Its outlook is overshadowing its results.

When this occurs with any stock, it raises a red flag. If you have a hefty investment in Meta stock, it is time to secure some profits, and when the inevitable negative headlines surface, seek another opportune entry point.

As of this writing, Dana Blankenhorn was long on positions in AMZN, GOOGL, INTC, and MSFT. The viewpoints expressed in this article belong to the author and are subject to the InvestorPlace.com Publishing Guidelines.

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