Post by : Badri Ariffin

Meta Platforms is facing growing investor concerns after significantly increasing its spending on artificial intelligence (AI) infrastructure, even as Chief Executive Officer Mark Zuckerberg defended the company's long-term strategy during its latest earnings discussion.

The Facebook and Instagram parent company is investing billions of dollars in AI-related infrastructure, including advanced chips, servers, energy resources, and large-scale data centers. These investments are designed to strengthen Meta's AI capabilities, but they have also sharply reduced the company's free cash flow.

During the second quarter, Meta reported free cash flow of $784 million, representing a 91% decline compared with the same period last year. Following the earnings announcement, the company's shares fell about 9% in premarket trading on Thursday as investors reacted to the heavy spending.

Meta Balances AI Expansion With Business Opportunities

Speaking during the earnings call on Wednesday, CEO Mark Zuckerberg said computing capacity has become one of Meta's most valuable strategic assets. Rather than focusing only on short-term profits, he said the company intends to continue expanding its AI infrastructure to support future growth.

Zuckerberg also revealed that Meta has received multiple offers from businesses interested in renting the company's computing capacity. According to him, several organizations were willing to pay a meaningful premium over Meta's investment costs to access its AI infrastructure.

However, he explained that the company must carefully balance these opportunities because selling too much computing capacity could reduce the resources available for developing Meta's own AI products and services.

AI Infrastructure Creates Revenue Questions

Meta's traditional business has been built around digital advertising on Facebook and Instagram. The company is now working to expand into AI products and services while competing with technology giants including Microsoft, Alphabet, and Amazon, all of which already have strong enterprise businesses and cloud computing operations.

Unlike these competitors, Meta does not operate a large enterprise cloud business that can immediately generate revenue by renting computing power to corporate customers.

Zuckerberg said Meta believes there will continue to be greater profit margins from selling AI-powered intelligence than from simply renting computing resources. At the same time, he acknowledged that selling computing capacity could also become an important business opportunity.

Zuckerberg Outlines Long-Term AI Vision

According to Zuckerberg, Meta expects AI-powered personal assistants to become products used by billions of consumers worldwide. He also said AI business agents could eventually help companies manage customer service, marketing, and sales activities.

Despite outlining this long-term vision, Zuckerberg provided only broad references to future revenue streams such as subscriptions and enterprise services, without offering detailed financial plans explaining how these businesses would support Meta's large AI investments.

When asked by J.P. Morgan analyst Doug Anmuth about Meta purchasing computing capacity from outside providers while also considering selling its own, Zuckerberg explained that the company is investing well ahead of expected demand.

He noted that building large data centers requires significant time before they become operational, and those facilities cannot generate value until they are fully online.

Analysts Compare Meta With Cloud Industry Leaders

Market analysts noted that Meta's investment strategy resembles that of major cloud computing providers, although its business model remains different.

Josh Gilbert, Lead APAC Analyst at online investment platform eToro, said Meta is investing like a hyperscale cloud company without having the same type of cloud business that companies such as Microsoft, Alphabet, and Amazon use to generate direct returns from their data center investments.

He added that Meta's AI infrastructure spending continues to rely heavily on advertising revenue because the company lacks a comparable cloud computing business.

Investors Recall Meta's Metaverse Spending

Some investors have drawn comparisons between Meta's current AI spending and its previous investment in the metaverse, which resulted in tens of billions of dollars in losses without becoming a major source of revenue.

The company's free cash flow decline during the April-June quarter was its steepest since late 2022, when investor concerns over metaverse spending were also high.

Despite those concerns, Meta increased the lower end of its capital expenditure forecast by $5 billion, raising its expected spending range to between $130 billion and $145 billion.

The announcement followed a similar move by Alphabet, which increased its own capital spending forecast by $15 billion last week. Alphabet also reported its first recorded cash burn, after which its shares declined by about 7%.

CFO Says AI Capacity Remains Valuable

Meta Chief Financial Officer Susan Li said the company believes the technology industry has historically underinvested in AI infrastructure, making existing computing capacity extremely valuable.

She stated that demand for AI computing resources is expected to remain strong for the foreseeable future, creating opportunities for Meta to generate returns through AI products, enterprise services, and potential computing capacity sales.

When asked by Wells Fargo analyst Ken Gawrelski whether Meta planned to use all of its computing capacity internally through 2027, Li said the company expects to find profitable uses for additional computing resources both inside and outside the business. However, she did not specify which approach would ultimately generate the highest returns.

Following the earnings call, Bernstein analyst Mark Shmulik commented that the discussion felt more like a brainstorming session than a presentation of a clearly defined strategy.

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