Meta's Spending Plans Sent Stock Tumbling, But Seen Boosting Long-Term AI Leadership

Meta Platforms (META) shares tumbled over 10% Thursday, a day after the company said it expects higher expenses to invest in artificial intelligence (AI), but analysts said the near-term spending could boost Meta's position in the long term.

The tech giant reported first-quarter earnings after the bell Wednesday, beating analyst estimates, but the company gave a weak outlook and increased the lower end of its projected full-year expenses, sending shares lower.

Some Early Success With AI Monetization

On Meta's earnings call, CEO Mark Zuckerberg reported that 30% of the content users see on Facebook and 50% on Instagram is delivered by its AI recommendation engines. He said AI-powered recommendations improve engagement and increase ad efficiency.

Third Bridge analysts wrote that "the company's revenue and market-share performance has been supported by its AI-enabled Advantage+ platform," noting "the volume increases and pricing benefits associated with the platform."

"However, some other potential ROI benefits of the company's AI initiatives and spending seem less clear," the analysts added. Meta "has started to try to explain to stakeholders," but the lack of a definitive timeline, clearly outlined return expectations, and specific long-term impacts on the business have raised concerns.

JPMorgan said that while Meta's mission around becoming a leading AI company is ambitious, the analysts were "encouraged" by Meta’s success with Llama 3 and Meta AI.

Near-Term Challenges

Wedbush analysts said they "think the setup will be challenging in the near-term as investors contemplate the implications of more aggressive spending with returns likely to be realized over a longer period."

"Upside in the near term may be limited," the analysts wrote, noting that investors are waiting for "more clarity on potential 2025 spending levels," evidence that the company can meet growth expectations despite harder comparables, and sustainable user and advertiser engagement with new AI offerings.

Bank of America analysts said that while the positive momentum cycle could be over, Meta is "investing in the right places."

Third Bridge offered a similar sentiment, saying "some undoubtedly wonder if the company's positive momentum is somewhat or even largely a thing of the past."

Increased Spend Could Position Meta as an AI Leader Long Term

While increased spending to invest in AI may have made investors nervous, analysts indicated Meta could be on the right track investing in the long term.

Wedbush analysts revised its estimates to reflect "the increased pace of expense growth and higher capex spending over the next few years as Meta repositions itself to emerge as a long-term leader in AI."

William Blair wrote that while "the scale and timing of the generative AI investment will be larger and longer than previous platform investments," the analysts "believe it is still exercising prudence in spending and ultimately will be one of the leaders in the AI race." They noted that it "may take some time and further proof points to investors."

Bank of America said that while "expectations reset," the "AI leader building on strength" with its early success leveraging AI in its platform offerings.

Meta shares lost 10.6% Thursday to finish at $441.38, though even at that price, they've gained close to 25% since the start of 2024.