Huge investment in AI raises concerns Meta (META.US) free cash flow plummeted by 94%, and some Wall Street institutions are still firmly optimistic about the long-term outlook

The Zhitong Finance App learned that the latest quarterly results of Meta Platforms (META.US) highlight the high costs brought about by the artificial intelligence (AI) competition. As capital expenditure continued to rise, free cash flow and profitability were under heavy pressure, and management failed to provide the market with clear expectations that AI investment returns would soon be realized, the company's stock price was sold off. As of press release, the stock was down more than 9% to $532.7.

Meta said AI investment will continue to drag down free cash flow and profitability as the lower limit of capital expenditure guidance is further raised by $5 billion. According to the data, the company's free cash flow for the quarter was only 784 million US dollars, a sharp drop of about 94% from the previous quarter's 12.4 billion US dollars, which became the focus of market attention.

Wedbush analyst Ygal Arounian said during the Meta performance conference call that although the company is advancing a number of strategic layouts that are expected to improve AI commercialization capabilities, it is still in a very early stage, and there is still a long way to go before it actually realizes large-scale monetization.

Meta CEO Zuckerberg said that the value of the company's additional computing power is higher than its construction costs, but the opportunity to actually use this computing power to commercialize is not expected to appear until 2027. However, Wall Street does not fully agree with this. Investors worry that free cash flow will continue to be squeezed against the backdrop of continuing to invest hundreds of billions of dollars in AI development over the next few years.

In addition to pressure on profitability, Meta's expanding AI strategy has also raised concerns about resource allocation in the market. Currently, the company is simultaneously promoting various projects such as artificial intelligence, large models, smart glasses, self-developed chips, AI commercial agents, and data center construction. Some analysts believe that this may cause management and R&D team resources to be too scattered.

Needham analyst Laura Martin said that Meta is currently “playing too many battles at the same time,” with different businesses corresponding to different products, customers, sales systems and competitive advantages. She believes that the company continues to expand new businesses rather than concentrating resources to develop the core business with the highest return. This strategic fragmentation reduces Meta's probability of success in achieving its goals.

However, there are also a number of Wall Street agencies that continue to be optimistic about Meta's long-term prospects.

Evercore analyst Mark Mahaney reiterated Meta's “outperforming the market” rating and believes that the current stock price is attractive. He said that the current focus of the market is no longer on Meta's core advertising business, but on whether the company can use AI to create new products, services and commercialization models. He believes that the probability of achieving this goal is higher than market expectations reflected by the current price-earnings ratio of about 16 times, and the low valuation is mainly due to management's failure to provide a sufficiently clear AI commercialization roadmap at the performance meeting.

Mahaney pointed out that Meta's core business performance is still strong, but due to the huge scale of AI investment in this round, the market wants to see more substantial evidence of AI monetization other than the advertising business, and this performance did not provide such information.

Morgan Stanley analyst Brian Nowak also maintained an “overweight” rating on Meta. He pointed out that Meta's apps have reached 3.6 billion daily active users, and Instagram has also surpassed 2 billion daily active users. The core business still has a strong user base, user stickiness, and commercialization moat. As Meta uses large-scale language models to conduct more in-depth analysis of massive data, it is expected that its advertising efficiency and monetization capabilities will be further improved, and it will continue to provide sufficient cash flow support for AI investments.

Citigroup Research also maintains Meta's “buy” rating. Analyst Ronald Josey said that although the second-quarter revenue and third-quarter results guidelines are generally in line with market expectations, the company continues to increase investment in AI, which is expected to spawn more commercialization tools in the future. At the same time, he acknowledged that capital expenditure continues to rise, and the timing and profitability of AI return on investment will still be the focus of market debate.

Overall, despite rising capital expenditure, rising legal fees and layoff costs, and short-term market concerns raised by free cash flow pressure, mainstream Wall Street institutions generally maintained Meta's “buy”, “outperform the market” or “gain” ratings.