Meta Platforms: AI Return on Invested Capital Is Uncertain (NASDAQ:META)
Key Points
Mark Zuckerberg hasn't provided concrete details on the expected payoff from Meta’s huge AI capital expenditures.
The company’s AI capabilities are boosting the performance of its digital advertising.
Meta's plan to start leasing cloud capacity to external customers is a clear sign that it is overbuilding for its own data center needs.
Meta Platforms (NASDAQ: META) is a $1.7 trillion company. Its family of apps counts 3.56 billion daily active users. And it arguably benefits from the most powerful network effects on the face of the planet. All signs point to it being an elite business.
However, there are deep questions about how it will fare in the coming years. That's because it's also a hyperscaler, and forecasts it will spend $125 billion to $145 billion on AI data center capital expenditures in 2026 alone. Analysts expect even bigger outlays from it in 2027.
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But whether there will be a profitable payoff on these colossal expenditures is a huge point of uncertainty.
Here's what Meta shareholders should be thinking about.
Image source: Getty Images.
There's no clear line of sight
On Meta's first-quarter earnings call, an analyst asked founder and CEO Mark Zuckerberg what the return on invested capital would be over the coming 12 to 24 months from its AI-related spending spree.
"That's a very technical question," the tech mogul replied, and went on to explain that the company's philosophy rests on building great products and experiences first, then scaling and monetizing them afterward.
It's understandable if Meta bulls want to give its management team the benefit of the doubt. This is one of the world's most dominant and successful companies. Investors could be forgiven for trusting Zuckerberg's capital allocation decisions.
On the other hand, this is an unprecedented level of spending. Analysts' consensus view is that Meta will report $145 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2026. Its capex plans will soak up nearly all of that.
Spending on that scale should be paired with the ability to give investors a more insightful response about expected ROI than the one Zuckerberg gave on the most recent earnings call. Investors would have more confidence in the company's direction if they had some insight into what metrics management is tracking to gauge the success of its AI spending spree, or timelines for when to expect adequate returns.
It's getting cloudy
Because virtually all of Meta's revenue comes from ad sales, an obvious reason for all this spending would be to bolster its digital advertising capabilities through better targeting and monetization techniques, and to improve user engagement. This segment is firing on all cylinders, with sales soaring 33% year over year in the first quarter.
Meta's latest move, however, indicates it has overbuilt capacity and is spending too much. As part of the Meta Compute initiative, the company recently announced it is forming a new cloud segment to lease excess compute resources to external customers. The good news is that this can generate revenue quickly, as data center demand globally is substantially outstripping supply.
However, investors should still be more critical of Meta than they have been, as hundreds of billions of dollars are now at stake.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.