Meta is diving because it’s not Google or Microsoft

Three giant tech companies reported earnings yesterday, all claiming that their record revenue came courtesy of AI. And all said their spending to furnish AI would continue to grow.

One stock soared, one is down about 3%, and one plummeted more than 10%.

For those of you who didn’t attempt to follow three separate tech companies annoyingly — purposefully? — reporting on the same day, the big gainer is Google. Microsoft, which said its capex would rise this fiscal year in a reversal of its earlier prediction of moderate spending, is down slightly despite otherwise stellar earnings.

The stock that is falling like rain is Meta. And price targets from Wall Street are falling, too.

Mark Zuckerberg’s tech behemoth posted record revenue but missed on earnings thanks to a one-time tax charge. Without that, its earnings per share and net income would have been above expectations.

The reasons for the three companies’ divergent reactions are surely buried in the intricacies of their individual earnings reports, but there’s also a more straightforward story: Microsoft and Google have cloud businesses and Meta does not.

Meta is spending on AI like the rest of them, but unlike the others, which sell that capacity to others for revenue, Meta’s AI spending is all for internal use.

A Bloomberg report this morning said that Meta plans to raise at least $25 billion through a multipart bond sale to fund AI infrastructure and data centers, marking one of the year’s largest corporate debt offerings.

“To date, we keep on seeing this pattern where we build some amount of infrastructure to what we think is an aggressive assumption and then we keep on having more demand to be able to use more compute, especially in the core business in ways that we think would be quite profitable, than we end up having compute for,” Zuckerberg said by way of justifying “significantly larger investment” in AI that is “very likely to be a profitable thing over some period.”

He did float the idea of selling extra compute if the company overbuilds its AI infrastructure, but that would be more of a last resort than a business plan.

Zuckerberg emphasized that the company has a proven track record of building things that lots of people use and that have eventually printed money, which it is now using to invest in AI with the hopes of repeating that strategy.

“We want to be able to kind of build novel things, build them into a lot of our products, and then have the compute to scale them to billions of people. And we think that that’s going to both show up in terms of new products being possible in new businesses and very significant improvements to the current business, too,” Zuckerberg told investors. “That’s the point at which we think that this is going to be just an extremely profitable business.”

But the “trust us” approach doesn’t seem to be working for investors, especially from a company with the recently spotty history of pivoting its whole business and name behind a flopped metaverse.

The earnings call went something like this, in a nutshell:

Meta: We can’t spend money fast enough to meet demand that we think is going to be profitable!
Investors: Where will that pay off?
Meta: Everywhere!

Google and Microsoft have obvious paths to ROI. Even if AI is a bubble, they’re at least selling that AI server space to others and capitalizing on the bubble.

It’s harder for investors to understand how exactly Meta will turn its massive spending into ROI, and they’re currently punishing Meta for that lapse.