A dozen years ago, Meta Platforms (NASDAQ:META) CEO Mark Zuckerberg made business history by betting Facebook on open source clouds, and META stock benefitted. Facebook was just coming public, its market cap
It had revenue of the year before but just in operating cash flow. The cost of getting into cloud at the time was about $1 billion per quarter. Zuckerberg won that bet. Now he’s making the same gamble, only with $135 billion in 2023 revenue and a market cap of $1.19 trillion. Wall Street is all-in with him. Let’s take a look at META stock.
META Stock and the Cost of AI
The bet this time is up to in capital spending this year alone. This goes on top of a 50 cent/share dividend (costing $5 billion for the year) promised in its , and continuing , up to
Why are analysts so certain Meta has this right? One reason is Meta is using in building its models. This means it’s not bearing the full cost of its AI development, unlike rivals. It also means it lacks full control over the results.
Meta is confident because this is what it did back in the day. It founded the to cut the costs of cloud development by sharing best practices. The board now has members from Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) and Intel (NASDAQ:INTC).
But this effort is more controversial. Rival OpenAI, which began as open source, now says AI creation is . Zuckerberg’s promises, meanwhile, seem as outrageous as those of OpenAI CEO Sam Altman’s, to build
Question is, how do you make money off any of it?
Meta’s AI Business Model
Meta from AI this year.
There are already some non-financial results. Meta is using AI to on its social media platforms. It has created telling content developers what they should and shouldn’t do. The aim is to increase engagement, while filtering out content deemed harmful,
The idea is to let advertisers when buying Reels, Instagram and (soon) Threads ads. This is , a collection of AI tools specifically for advertisers, automating campaigns.
How much Meta can make from ads will, as with Amazon’s (NASDAQ:AMZN) Prime Video, be measured by how much it charges people to avoid them. European regulators are fuming over Meta’s proposal to for opting out of its ads and user tracking. But the price it puts on that service will tell analysts its value.
This means that what’s making the headlines, its use of Facebook and Instagram images to are just a sideline. It’s something of a magic trick. Critics can focus on Meta’s development of user tools while the money comes rolling in from better ad targeting.
The Bottom Line
Many analysts believe Meta’s AI strategy makes a valuation of almost 9 times revenue reasonable. Its strategic investments in AI, as well as augmented and virtual reality (Reality Labs has lost so far) look certain to pay off.
But will they? Zuckerberg insists the layoffs that are still continuing have . Older technologies were just “overbuilt,” he says.
This doesn’t pass the laugh test. Even bullish investors see Meta as . Its
When that happens with any stock, it’s a danger signal. If you’re heavily into Meta stock It’s time to take some profits and, when the inevitable negative headlines come in, look for another buy point.
As of this writing, Dana Blankenhorn had LONG positions in AMZN, GOOGL, INTC and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
