(Bloomberg) — Mark Zuckerberg is asking investors to remain patient. Again.
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After Meta Platforms Inc. announced it would spend billions of dollars more than expected this year, fueled by investments in artificial intelligence, the company’s chief executive did his best to reassure Wall Street. The spending forecast, coupled with slower-than-expected sales growth, sent shares down as much as 19% in extended trading.
It was a familiar reference for Zuckerberg, who had previously said that the company’s future technological prospects would eventually pay off — and that smart shareholders should stick with it.
“Smart investors recognize that the product scales and that there is a clear monetizable opportunity even before revenue is realized,” he said during a conference call following Meta’s first-quarter earnings report. The company already credits AI for some of its recent user growth and advertising success and points to improvements in its recommendation algorithms.
Facebook parent is pouring increasing resources into artificial intelligence, which requires significant investments in computing power, part of an arms race with rivals from Alphabet Inc. to Microsoft Corp. for dominance in this rapidly evolving technology. Zuckerberg warned that investments would increase “in a meaningful way” and that it would take a long time to produce returns for the social networking company – possibly years – but urged it to recognize the long-term benefits that AI has to offer .
Zuckerberg followed a similar path as Meta dedicated himself to building the so-called Metaverse and other futuristic technologies such as VR headsets and smart glasses. These efforts were costly. Reality Labs, the division within Meta that is leading this effort, lost $16 billion in 2023. However, Zuckerberg says the progress the group has made over the past year – particularly success with its AI chatbot and Ray-Ban smart glasses – has given him confidence that further investment is necessary.
“We have become more optimistic and ambitious about AI,” Zuckerberg said. “We are at a point where we have shown that we can build leading models and be the leading AI company in the world. And that opens up a lot of additional possibilities beyond the ones that were most obvious to us.”
Realizing this vision will be expensive. The Menlo Park, California-based company raised its cost estimates for the year and now expects capital spending to be between $35 billion and $40 billion. Previously, the cost of servers, AI hardware and data centers was estimated at $30 billion to $37 billion.
“We expect capital expenditures to continue to increase next year as we invest aggressively to support our ambitious AI research and product development efforts,” Chief Financial Officer Susan Li said in a statement looking ahead to 2025.
At the same time, the social networking company forecast second-quarter revenue of $36.5 billion to $39 billion, with the midrange of that forecast falling below analysts’ average estimate.
Those metrics topped an otherwise solid first quarter with revenue of $36.5 billion, up more than 27% from the same period last year. Profits more than doubled to $12.4 billion.
The stock was up 39% so far this year at close and was trading near all-time highs last month, partly due to excitement around AI. Meta was one of the best-performing stocks among Big Tech competitors.
“For all of Meta’s bold AI plans, it cannot afford to lose sight of the core of the business – its core advertising activities,” Hargreaves Lansdown analyst Sophie Lund-Yates said in a note on Wednesday. “That doesn’t mean ignoring AI, but it does mean that spending needs to be targeted and in line with a clear strategic view.”
In the previous quarter, Meta announced a $50 billion share buyback in addition to the company’s first quarterly dividend. It was an attempt to appease investors frustrated by the company’s aggressive spending on technology that hasn’t yet fully paid off.
In recent months, Zuckerberg has made AI a priority and refocused Meta on technology after OpenAI released its ChatGPT chatbot in 2022, sparking frantic competition and strong development among major tech companies. Meta has begun integrating AI into all areas of the company, from Instagram and Facebook to its smart glasses.
The company announced plans for a new $800 million data center in January and is also developing its own chips for artificial intelligence services. Meta is also working on several new iterations of its large language model, known as Llama, to support chatbots and other AI services.
Read more: How AI replaced the metaverse as Zuckerberg’s top priority
The company reiterated its broader spending plans for 2024, saying it would spend $96 billion to $99 billion for the calendar year, up slightly from its lower target of $94 billion to $99 billion. It was previously said that a large part of this would flow into infrastructure costs in addition to long-term investments in augmented and virtual reality.
Meta’s mixed report comes the same day that President Joe Biden signed a bill that would take over TikTok’s parent company ByteDance Ltd. would force the popular video service to sell or face a ban in the US. The possible loss of a major competitor could give Meta’s advertising business a boost, as short-video offering Reels is a clone of TikTok.
Reels now account for about 50% of the time people spend on Instagram, Li said in a call with analysts. When asked specifically about the TikTok legislation, she said it was too early for the company to understand the potential impact.
Meta has endured turbulent times in recent years, with a surge in user numbers and activity on the platform during the Corona era during lockdowns, followed by a subsequent decline in advertising in 2022. Even in good times, Meta plunged in the hiring, resulting in job cuts of about 10,000 in 2023, a period Zuckerberg called a “year of efficiency.”
These painful steps paved the way for the significant increase in profits that the company is now seeing. First quarter sales were the highest ever during that period. More and more people are returning to Meta products.
Zuckerberg said the Threads app, which is similar to the former Twitter app and launched last July, now has more than 150 million monthly active users – including Taylor Swift.
– With support from Carmen Reinicke.
(An earlier version of this story corrected Mark Zuckerberg’s full name.)
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