Meta is betting that its AI gains will keep outpacing its AI losses

Meta is an advertising business and that ad business is doing very well.

Ad revenue, which makes up 98% of the company’s total revenue, rose 21% in its second-quarter earnings to $46.6 billion — higher than analysts had expected.

CEO Mark Zuckerberg credits AI for that growth.

“On advertising, the strong performance this quarter is largely thanks to AI unlocking greater efficiency and gains across our ad system,” he said during the company’s earnings call yesterday.

Meta’s earnings and revenue growth satisfied investors, with the stock up more than 11% in premarket trading, and forestalled concerns about the massive amounts of money the company is ploughing into AI.

That money is going toward developing Meta’s Superintelligence Labs — Zuckerberg defines “superintelligence” as “AI that surpasses human intelligence in every way” — and the infrastructure to support it. AI infrastructure is expected to be the company’s biggest driver of expense growth next year, followed by employee compensation to cover the huge pay packages for the superintelligence team.

The idea is that this effort will create outsized gains that ripple across the whole company, justifying the exorbitant cost. And so far, if Zuckerberg’s explanation for recent ad revenue growth is accurate, that appears to be the case.

However, that doesn’t mean all spending is good spending, and there are definitely areas for concern.

Chief among those is the Reality Labs division, which houses Meta’s AI wearables like the Quest mixed-reality headsets and Ray-Ban smart glasses.

Reality Labs brought in $370 million in revenue last quarter while posting $4.5 billion in losses. Since late 2020, it’s lost a total of nearly $70 billion.

It now appears that Zuckerberg is trying to shoehorn that segment into the rest of the company’s AI vision.

In a mini manifesto he posted yesterday ahead of the earnings report, Zuckerberg described Meta’s vision to bring “personal superintelligence” that “helps you achieve your goals, create what you want to see in the world, experience any adventure, be a better friend to those you care about, and grow to become the person you aspire to be” to the masses. Toward the bottom of the post, Zuckerberg said that to access such life-changing technology, humans will need some sort of device — namely the company’s smart glasses.

“I continue to think that glasses are basically going to be the ideal form factor for AI,” he said on the earnings call. “You can let an AI see what you see throughout the day, hear what you hear, talk to you, once you get a display in there... And that’s also going to unlock a lot of value where you can just interact with an AI system throughout the day in this multimodal way.”

As we’ve noted, just because tech companies want customers to use their face computers doesn’t mean it will happen. Meta has been angling to get into the device market since it was Facebook and its phone flopped more than a decade ago. It’s a compelling narrative for the company: billions of people use its apps and now it also sells the devices on which they use them. But it doesn’t necessarily follow that it will become a reality. People seem perfectly happy to use AI on their phones for now.

Facebook’s parent company has a less-than-stellar recent record rolling out new product lines. Remember the Metaverse, the virtual world that Facebook changed its name for and is widely considered a flop?

For what it’s worth, Zuckerberg made a rare recent reference to the metaverse as well yesterday, also trying to shove it into the larger AI vision. He said glasses “are going to be the ideal way to blend the physical and digital worlds together. It’s the whole Metaverse vision, I think, is going to end up being extremely important too, and AI is going to accelerate that, too.”