(Bloomberg) — Mark Zuckerberg is asking investors to remain patient. Again.
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After Meta Platforms Inc. revealed that it will spend billions of dollars more than expected this year — fueled by investments in artificial intelligence — the company’s CEO did his best to calm Wall Street. The spending forecast, coupled with slower-than-expected sales growth, sent shares plunging as much as 19% in extended trading.
It was a familiar topic for Zuckerberg, who has previously said that the company’s futuristic technology push will eventually pay off — and that smart shareholders should stick around.
“Smart investors see that the product is scaling and there is a clear opportunity to generate revenue even before the revenue materializes,” 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.
The Facebook parent company is pouring more and more resources into artificial intelligence, which requires significant investments in computing power – part of an arms race with Alphabet Inc. rivals. to Microsoft Corp. for supremacy in this rapidly developing technology. Zuckerberg warned that investments would increase “meaningfully” and that it would take a long time for the social networking company to generate returns – perhaps years – but urged them to see the long-term benefits that AI has to offer.
Zuckerberg took a similar approach when Meta focused on building the so-called metaverse and other futuristic technologies, such as VR headsets and smart glasses. Those efforts have been costly. Reality Labs, the division within Meta leading these efforts, lost $16 billion in 2023. But Zuckerberg says the progress the group has made in the past year – especially the 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 in 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 offers many additional possibilities, in addition to the options that are most obvious to us.”
Achieving that vision will be costly. The Menlo Park, California-based company has raised its cost estimates for this year and now expects capital expenditures to be between $35 billion and $40 billion. It previously estimated costs associated with things like servers, AI hardware and data centers at $30 billion to $37 billion.
“We expect capital expenditures to continue to rise 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, pointing to 2025.
At the same time, the social networking company also forecast second-quarter revenue of $36.5 billion to $39 billion, with the mid-range of that forecast lower than the average analyst estimate.
These numbers overshadowed an otherwise solid first quarter, with revenues of $36.5 billion, up more than 27% from the same period a year ago. Profits more than doubled to $12.4 billion.
The stock was up 39% so far this year at market close and has been trading near record highs over the past month, partly due to the excitement around AI. Meta was one of the best performing stocks among its Big Tech peers.
“For all of Meta’s bold AI plans, it cannot afford to turn away from its core business – its core advertising business,” Sophie Lund-Yates, an analyst at Hargreaves Lansdown, said in a note on Wednesday. “That doesn’t mean we should ignore AI, but it does mean that spending should be targeted and aligned with a clear strategic vision.”
In the previous quarter, Meta announced a $50 billion stock buyback, in addition to the company’s first-ever quarterly dividend. It was an attempt to calm investors frustrated by the company’s aggressive spending on technologies that have yet to fully pay off.
In recent months, Zuckerberg has made AI a priority by refocusing Meta on the technology after OpenAI released its ChatGPT chatbot in 2022, sparking a frenzy of competition and development among the big tech companies. Meta has started injecting AI into every facet of the business, from Instagram and Facebook to 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 major language model, known as Llama, for powering 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 will pay out $96 billion to $99 billion for the calendar year, up slightly from a low-end target of $94 billion to $99 billion. It was previously said that much of this would go towards infrastructure costs, in addition to long-term investments in augmented and virtual reality.
Meta’s mixed report comes on the same day that President Joe Biden signed a bill into law that would force TikTok’s parent company, ByteDance Ltd., to sell the popular video service or face a U.S. ban. The possible elimination of a major competitor could boost Meta’s advertising business, as its short-video offering Reels is a clone of TikTok.
Reels now represent about 50% of the time people spend on Instagram, Li said on 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 had a turbulent period in recent years, with a surge in users and activity on the platform in the Covid era during lockdowns, followed by a subsequent decline in advertising in 2022. Meta also hired staff as the times were good, leading to the elimination of approximately 10,000 jobs. in 2023, a period Zuckerberg called the “year of efficiency.”
These painful steps paved the way for the significant profit increase the company is now seeing. Sales in the first quarter were the highest ever during that period. More and more people are also returning to Meta products.
Zuckerberg said the Threads app, similar to the former Twitter and launched last July, now has more than 150 million monthly active users, including Taylor Swift.
–With help from Carmen Reinicke.
(An earlier version of this story corrected Mark Zuckerberg’s full name.)
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