meta platform (meta 4.32%) CEO Mark Zuckerberg’s “A Year of Efficiency” has paid off beautifully for patient shareholders. The stock is still more than 20% below its 2021 high, but the gap is closing as meta stocks rise an incredible 170% so far in 2023.
Zuckerberg had a lot to say about AI during his last earnings call, as most tech CEOs do these days. But there is one area that continues to baffle many investors. It’s the metaverse embodied in the Reality Labs (RL) division that continues to report billions of dollars in operating losses.
Meta hasn’t backed off from its long-term goals. Is this something to worry about, or is meta still a solid investment?
AI is where it is now
Meta made several layoffs earlier this year to right-size its business. But now that this cost-cutting effort is over, Meta’s next job is AI.
But what is the right amount? Zuckerberg said on a conference call:
Another major budget point we’re working on is what the appropriate level of AI is. [capital expenditure] To support our roadmap. We don’t know how fast our new AI products will grow, so we may not have a clear picture until later this year.
Capital expenditure, or capital expenditure, is money spent on property, plant and equipment. Billions of dollars have been poured into new data center infrastructure in recent years (Meta operates its own data centers for Facebook, Instagram, and WhatsApp), and it’s paying off.
One area where this is evident is Reels, Facebook and Instagram’s response to the sudden emergence of TikTok. AI-powered video rankings and recommendations are driving more time spent on social apps, Zuckerberg said, reaching $10 billion in annual revenue for Reels (up from $3 billion the year before). Stated.
Other significant short-term developments include support for WhatsApp Business Messaging and Click-to-Message advertising, AI tools to help marketers improve the monetization of their advertising campaigns. But one area where he is introducing uncertainty into the timing of capital spending is generative AI.
Meta recently announced that it will make the open source Llama 2 big language model available to developers in the following ways: microsoftcloud platform Azure, Amazon On AWS and other public clouds.Meta was recently announced at the same time Qualcomm These AI algorithms will be available on mobile devices from 2024.
It’s unclear how fast these AI services will grow, but Meta expects to increase infrastructure spending in 2023 from $27 billion to $30 billion, up from its previous guidance of $30 billion to $33 billion. It is planned to be reduced to a range. With revenues trending back up again (expected to grow 25% year-over-year in Q3) and capital expenditures down, Meta’s bottom line is crumbling.
And then there’s the metaverse
Cutting costs and increasing profits may sound a bit contradictory. Zooming in on RL segments, Quest AR/VR headsets, and related content can reveal all kinds of content. Unprofitable. By the first half of 2023, RL reported an operating loss of $7.7 billion on sales of just $616 million (down from $1.15 billion in sales in the first half of 2022).
Of course, Meta is gearing up to release its next-generation Quest 3 headset this fall for $500, and it will be going head-to-head with it. appleof (AAPL 1.44%) The Vision Pro is a ridiculous $3,500. Quest 3 will probably give RL some boost. Nonetheless, this Metaverse project doesn’t exactly fit his 2023 Year of Efficiency.
Or is it?
Having changed its name to “Meta” a few years ago, Zuckerberg and his company offer a perspective on Metaverse operations unlike any other company. What would Apple shareholders think if CEO Tim Cook and CFO Luca Maestri provided a quarterly update on the billions of dollars spent on the Vision Pro over the years?
But unfortunately there is no such clarity. It’s probably for the best. A business investment project of this magnitude is simply too expensive and can take years to recoup. As proof, I’d like to point once again to Facebook’s acquisition of WhatsApp, which he bought for his $16 billion in 2014, but only recently started monetizing in earnest.
Either way, as we’ve seen, investing in AI can help pave the way for a robust metaverse business in the years to come. AI-enhanced advertising platforms and new generative AI tools like the open-source Llama 2 at developer’s disposal can help make 3D world building a more viable endeavor. And meanwhile, Meta is working on perfecting the hardware with the Quest headset. This is really what ad-based software businesses need to survive in the long term. Breaking by peers like Apple (when they cut off access to Meta’s ads on iOS) is not ideal.
Partnering with content companies such as roblox (RBLX 4.04%)Zuckerberg’s reminder that he’s coming to a Quest headset near you at the earnings call certainly could help with AR/VR adoption as well.
Do you buy meta?
After a great earnings report in Q2 and an even better outlook for Q3, I’m holding my existing position in the meta. In late 2022, when the stock was trading in the single digits, this was an insane deal.
Nevertheless, AI and Final The metaverse could be the next big thing in computing platforms, and meta stocks are at least worth keeping an eye on. The company’s stock is trading at about 22 times its expected earnings in 2024, which isn’t cheap, but it isn’t exorbitant either.
John McKee, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Randy Zuckerberg is the former head of market development and public relations at Facebook, the sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Nicolas Rossorillo and his clients have held positions at Amazon.com, Apple, Meta Platforms and Qualcomm. The Motley Fool has positions and endorses Amazon.com, Apple, Meta Platforms, Microsoft and Qualcomm. The Motley Fool has a disclosure policy.