Perhaps Meta’s reported ad revenue growth, along with its planned AI investments, will provide some comfort to observers worried about the pace and payoff of such investments.
Those developments, where the fundamentals of the legacy business are robust, while AI investments are reasonable enough to be supported to that revenue, arguably represent the best case so far for balancing AI capex and current earnings.
Where Meta now predicts full- year 2024 capital expenditures in the range of $37 billion to $40 billion, updated from its prior range of $35 billion to $40 billion, second-quarter revenues were up 22 percent ( 23 percent on a constant currency basis), year over year.
“At the end of the day, we are in the fortunate position where the strong results that we're seeing in our core products and business give us the opportunity to make deep investments for the future,” said Mark Zuckerberg, Meta chairman and CEO.
Which might also illustrate another key principle: so-called “AI stocks” might have to be evaluated based primarily on how their core legacy businesses are situated, irrespective of any future benefit from AI operations and products, since such benefits will not be obvious for some time.
“While we expect the returns from Generative AI to come in over a longer period of time, we’re mapping these investments against the significant monetization opportunities that we expect to be unlocked,” Zuckerberg noted.
In the particular case of Meta, at least some analysts and observers will be heartened by the apparent recognition on Meta’s part that AI is the more-immediate opportunity, compared to augmented reality, for example.
“A few years ago, I would have predicted that holographic AR would be possible before Smart AI, but now it looks like those technologies will actually be ready in the opposite order,” said Zuckerberg.
Commenting on “the AI platform shift,” Similar to the cloud, this transition, Satya Nadella, Microsoft Chairman and CEO, noted that AI is similar to the prior transition to cloud computing, involving capital-intensive investments.
In other words, investment has to be made.
As was the case at Alphabet and Meta, revenue was up 15 percent, year over year in the second quarter of 2024.
Al capex also is up at Microsoft, but “roughly half of FY2024's total capital expense as well as half of fourth-quarter expense, it's really on land and build and finance leases, and those things really will be monetized over 15 years and beyond,” said Amy Hood, Microsoft CFO.
Over at Alphabet, second-quarter 2024 revenues were up 14 percent (15 percent) in constant currency, year over year. But AI capex is expected to hit $50 billion in 2024.
Market watchers seem to see danger for Alphabet’s search revenue stream as rival AI suppliers seek to cut into Google’s search dominance, beyond the issue of AI capex magnitude.
“The risk of under-investing is dramatically greater than the risk of over-investing for us here, even in scenarios where it turns out that we are over investing,” said Sundar Pichai, Alphabet CEO.
It also is worth noting that, because of regulatory scrutiny, it no longer is possible for Alphabet to “acquire” positions in markets or capabilities. Instead, it has to grow them organically.
The implications of Meta’s positioning on AI capex might be about as good as it gets: robust core revenue drivers able to support AI capex. Alphabet’s ad growth was not as good as Meta’s in the second quarter, and beyond that there are the concerns of search market share dangers.
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