Meta aims to compete with cloud giants, but pays a heavy price
Investors are concerned as Meta's heavy spending on AI and persistent losses in virtual reality projects weigh on the company's stock, despite the continued growth of Instagram.
Mark Zuckerberg's bet on Instagram remains the corporation's key asset. The Facebook founder acquired the social network 14 years ago for one billion dollars, and today it serves as the primary engine for Meta's revenue. According to Zuckerberg, time spent by users on Instagram grew by a double-digit percentage over the past year, largely due to artificial intelligence interface improvements. In the second quarter, Meta's revenue jumped 28% to 60.8 billion dollars, the fastest growth rate since late 2021. Meanwhile, ad exposure rose by 14%, and the average price per ad increased by 12%.
However, the question remains: do Instagram's gains justify annual capital expenditures of 145 billion dollars? Meta's business model, reliant on advertising, requires investments comparable to those of tech giants like Google, Microsoft, and Amazon. Unlike them, however, Meta is not a cloud provider and does not sell cloud services to third parties. When Meta raises its capital expenditure (Capex) forecast for chips, servers, and data centers, sacrificing free cash flow, investors react negatively. Meta's stock plunged 8% in after-hours trading on the Nasdaq following a 1% decline during the regular session. Year-to-date, the stock has fallen 11%, making it one of the most disappointing assets in the tech sector.
Heavy losses from virtual reality investments
Zuckerberg is not only ramping up hardware purchases—the capital expenditure forecast has been raised from an average range of 125 billion dollars to 137.5 billion—he is also hinting at a transformation into a "neo-cloud" company, ready to rent out AI computing power to external clients. Last Tuesday, Meta announced a partnership with BlackRock to build server farms in Texas at a cost of 14 billion dollars. This marks a significant shift in strategy, which previously focused solely on advertising and virtual reality headsets.
Zuckerberg has yet to present a clear organizational structure for this venture. He speaks of "opening computing capacity to third-party clients" and the potential for profit from selling AI services rather than just raw computing power. Investors, however, remain skeptical. Simultaneously, the company continues to incur massive losses from its virtual reality division: in the last quarter, losses totaled 4.6 billion dollars, while revenue grew by only 60 million for the year. Since 2020, cumulative losses in this segment have reached 80 billion dollars.
In the past, the market reacted negatively every time Zuckerberg mentioned the "metaverse." While that term has largely faded, spending on related projects continues. Given the lack of a consolidated cloud business, reduced cash flow, and lowered revenue forecasts, there is no certainty that the stock will recover in the near term.
