Why investors are unhappy with Facebook's big AI budget

Facebook 's parent company, Meta , reported a surge in profits for the first quarter of 2024, but concerns about rising costs associated with artificial intelligence ( AI ) sent its stock price tumbling after hours, according to AFP.

Meta, led by CEO Mark Zuckerberg , boasted a net profit of $12.4 billion for the January-March period.

Total revenue, primarily driven by advertising sales, also saw a significant 27% increase to $36.5 billion.

"We estimate that more than 3.2 billion people use at least one of our apps each day and we're seeing healthy growth in the US," Zuckerberg said in a call with investors, as reported by AFP.

Analysts credit Meta's growth to its advanced advertising tools and the success of Reels, its TikTok-inspired short video format. Additionally, the company is exploring monetization options for Threads, its messaging platform, which could provide a strong alternative to Twitter for advertisers seeking real-time engagement.

AI Investment Raises Concerns
Meta's financial performance reflects a continued recovery from a challenging 2022. The company implemented significant cost-cutting measures, including substantial layoffs, in what Zuckerberg termed the "year of efficiency." This strategy helped Meta rebound in 2023.

While Meta's global workforce has grown slightly compared to the last quarter, it remains significantly lower than the 2022 peak of over 87,000 employees. The company's stock price soared in 2023 due to investor enthusiasm for AI, nearly tripling in value. This upward trend continued in 2024 with a further 40% increase.

However, after-hours trading on Wednesday saw a sharp decline of nearly 17% in Meta's share price. This drop is attributed to investor anxieties surrounding rising expenditures, particularly those related to AI development. Meta anticipates full-year capital expenditures to reach $35-$40 billion, exceeding the previously projected range of $30-$37 billion.

Zuckerberg acknowledged the potential for volatility in the company's stock price during the investor call, according to AFP. He urged investors for patience as Meta makes strides in AI, emphasizing the historical pattern of fluctuations when introducing new products before they become profitable. Additionally, Zuckerberg highlighted the long-term nature of building a leading AI system, suggesting it could take several years to achieve significant financial returns.

Meta's big-big AI ambitions
Last week, Meta unveiled an upgraded version of its AI assistant, powered by LLaMA 3 , the company's most powerful large language model. This AI is currently being deployed across Meta's various platforms, including Facebook, Instagram, WhatsApp, and Messenger, in a dozen English-speaking countries. Notably, LLaMA 3 is also available as an open-source tool for developers to create their own AI applications.

The race for AI dominance among tech giants is heating up, with Microsoft, partnered with OpenAI (creators of ChatGPT), considered the frontrunner. Microsoft's established cloud computing business, a service not offered by Meta, provides them with an additional advantage. This, coupled with the high costs of AI development, is a major concern for Meta investors.

Meta's metaverse division, focused on integrating real and virtual worlds through VR technology, continues to incur substantial losses, although these losses were lower than projected at $3.8 billion. Zuckerberg expressed confidence in the future of the metaverse and highlighted the "going really well" partnership with Ray-Ban for developing VR glasses, according to AFP.