In the midst of an unprecedented AI buildout, Meta is spending more than most. The company is building two massive data centers, and reporting indicates there will be as much as six hundred billion dollars in spending on United States infrastructure over the next three years. Those figures might not raise eyebrows in Silicon Valley, but they are starting to make Wall Street nervous.
The issue came to a head this week as Meta reported quarterly earnings, which showed the company’s operating expenses jumping seven billion dollars year-over-year and nearly twenty billion dollars in capital expense. It was the result of intense spending on AI talent and infrastructure, which has yet to bring in meaningful revenue for the company. When analysts pressed for more specifics, Mark Zuckerberg made it clear the spending was just getting started.
Zuckerberg told analysts that the right thing to do is to try to accelerate this to make sure that they have the compute they need, both for the AI research and new things they are doing, and to try to get to a different state on their compute stance on the core business. He stated that their view is that when they get the new models they are building in the Superintelligence Lab in there and get truly frontier models with novel capabilities that you do not have in other places, then he thinks that this is just a massive latent opportunity.
If his goal was to reassure investors, it did not work. By the end of the call, Meta’s share price had plummeted in value. Two days later, the rout had only deepened. The stock dropped twelve percent by the closing bell on Friday, representing more than two hundred billion dollars in lost market capitalization.
It is dangerous to read too much into stock prices, and in strict financial terms, Meta’s quarterly earnings were not that bad. Twenty billion dollars in quarterly profit is nothing to complain about. But this was the first quarter in which Meta’s aggressive AI spending on both talent and infrastructure had a visible impact on the company’s bottom line. Even more alarming was that, aside from a lot of enormous data centers and well-compensated AI researchers, it was not clear what the money actually bought.
Analysts pressed Zuckerberg on why he was spending so much on AI, and when they could expect to see revenue from the growing spending. But the call came at an odd spot in Meta’s planning, with no clear budget for projected spending and no available product that could anchor a revenue forecast. As a result, Zuckerberg was left with only general claims about the promise of AI.
He said during the call that there are going to be all kinds of new products around different content formats, and they are starting to see that. He also mentioned the business versions of all these, and how more intelligent models are going to improve the core business and improve the recommendations they make across the Family of Apps and improve the recommendations in advertising.
Meta is not the only company spending billions of dollars on AI infrastructure, so it is worth teasing out why this same spending is not spooking investors at Google or Nvidia, both of which had a great quarter. OpenAI is the biggest offender, spending the same amount with far less financial cushion than Meta.
There really are concerns that we are creating a bubble, and if we are, Meta’s core business will let it ride things out better than most. But if you ask Sam Altman why he is spending hundreds of billions of dollars on compute, he will tell you he is operating one of the fastest growing consumer services in human history, and one bringing in twenty billion dollars a year in revenue. We can argue about how sustainable the growth rate is, but there really is a fast-growing product at the bottom of all the OpenAI hype. A fast-growing annual recurring revenue figure goes a long way to answer questions.
Meta does not have a product like that, and it is not clear where it is going to come from. The company’s most powerful AI product is the Meta AI assistant, which Zuckerberg noted on the call has more than a billion active users. But those numbers are surely boosted by the three billion active users on Facebook and Instagram, and it is hard to see the current version of Meta AI as a competitor to ChatGPT. There is also the Vibes video generator, which really did boost daily active users, but has limited business impact beyond that.
The most ambitious project is the Vanguard smart glasses released earlier this month. However, the glasses feel more like an extension of Meta’s Reality Labs work than a real attempt to harness the power of large language models. Put simply, these are promising experiments, not fully formed products.
It is telling then that when he was pressed on infrastructure spending, Zuckerberg’s response was not to point to the recent launches, but to focus on the next generation. Zuckerberg stressed, while emphasizing the pending impact of the Superintelligence Lab’s new models, that he was very excited about new products. He said it is not just Meta AI as an assistant, and that they expect to build novel models and novel products, and he is excited to share more when they have it.
But this was an earnings call, not a product launch, so all he could say was that there would be more to share in the coming months. As the market response showed, that answer is wearing thin.
To be fair, it has only been four months since Zuckerberg restructured his company’s AI team, and the new Superintelligence team has not had time to launch an earthshaking AI product yet. But as the company spends billions of dollars to stay competitive in AI, there is still no clear indication of what role Zuckerberg wants to play in the new industry.
Will Meta AI use the company’s detailed store of personal data to grow into a ChatGPT competitor? Is Vibes the first step in a consumer entertainment play, building off Meta’s targeted ad system? Or maybe Zuckerberg’s references to business AI are hints at a more detailed enterprise play? So far, it is anyone’s guess. Whatever the answer, the pressure is on Meta to find it, and soon.