Meta Platforms Inc. shares plunged 11% on Wednesday after the company revealed plans to significantly increase its spending on artificial intelligence (AI) projects. This investor reaction follows a quarterly report showing a 14% decline in profits, even as revenue grew.
The social media giant, parent company of Instagram and Facebook, now expects to spend between $130 billion and $145 billion this year, primarily on AI initiatives. This figure represents an increase from the $125 billion projected just three months prior. The decision to boost AI investment comes despite profits falling to $6 billion for the April to June quarter, down from the previous year. Revenue for the same period did increase by 28% to $61 billion.
This substantial commitment to AI spending, without immediate clear returns, has raised concerns among investors. The situation echoes Meta's previous multi-billion dollar investments in the metaverse, which largely failed to gain widespread user adoption. Analysts like Mike Proulx from Forrester suggest investors are now questioning whether Meta's AI push is a strategic diversification or a potential distraction from its core business.
Chief Executive Mark Zuckerberg defended the strategy, stating that AI spending is "accelerating every part of our core business." He also indicated plans to sell Meta's AI technology to other businesses, a move Chief Financial Officer Susan Li believes will help drive returns. However, these new lines of business have not yet materialized, contributing to investor skepticism.
The company's free cash flow, the money left after operational expenses, dropped to $784 million for the quarter. This marks the lowest level in at least five years, with much of the generated cash being absorbed by AI infrastructure spending. This trend contrasts with Microsoft, which also reported significant AI investments but saw its shares rise 5% after reporting strong quarterly results, indicating that investors can accept AI spending when coupled with clear financial returns.
Zuckerberg remains optimistic, stating his "personal bet is that the people who invest in this will feel very good and be rewarded over time." He highlighted that Meta's AI capabilities are already boosting engagement on Instagram and Facebook and assisting small businesses with advertising. The company is also developing AI agents, or autonomous chatbots, which Zuckerberg expects to be the "next wave of our product line in the months and years to come."
Meta plans to make its Muse Spark AI model easier for other companies to integrate, aiming to build a large business by selling AI models and computer tools. Zuckerberg acknowledged this would require flexing "a different muscle than we've historically had" but emphasized the significant financial opportunity in API services and productivity tools. The market will closely watch for concrete evidence of these new revenue streams and the impact of AI investments on Meta's profitability and cash flow in upcoming quarters.