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Investors’ tolerance for extravagant corporate spending on artificial intelligence is showing signs of weariness. Meta shareholders were poised to back Mark Zuckerberg’s AI ambitions as the company’s digital advertising business boomed, costs fell elsewhere and cash returned. They are more cautious now as revenue growth slows and costs rise.
Meta has been praised for the technological prowess of its generative AI projects. Unlike some of its competitors in Silicon Valley, these are developed in-house. This month, the company announced its first chip designed to run AI models and the latest version of its generative AI model, Llama 3.
However, like the company’s virtual reality Metaverse plan, AI is a multibillion-dollar project with no clear timeline for revenue. Meta says it will increase spending by up to $10 billion this year to cover infrastructure costs. While AI spending is not broken down in the same way as the Metaverse, costs are reflected in capital expenditures. Last year, investments fell to $28 billion. This year, Meta expects annual capital spending of up to $40 billion, $3 billion more than initially expected. This would correspond to 25 percent of the forecast annual sales. Next year the amount will be even higher.
Even with billions of dollars pouring into the company, it’s still not clear what kind of AI company Meta is building. It does not sell the chips it developed nor the generative AI model it created, which is open source. Revenue continues to come from the company’s digital advertising business with a small sideline in VR headsets.
Meta has integrated generative AI into products like Instagram and Facebook to increase engagement. However, no data has been provided regarding an increase in the amount of time users spend staring at these apps on their phones. Third-party estimates, including a study by nonprofit Common Sense Media, suggest that engagement will need to increase by hours each day to catch up with TikTok. A US ban on the addictive video app could benefit Meta, which has a competing product, Instagram Reels. But that possible outcome is still years and litigation away.
Meta has means to spend. In the most recent quarter, operating profit rose 91 percent. There is no risk of buybacks and dividends being withdrawn. Still, it’s difficult to predict how much Meta wants to spend on AI. Zuckerberg tried to allay concerns by comparing the project to previous investments in Reels or Stories. But these were much smaller. The extent of the company’s AI ambitions is only just beginning to emerge.