Meta Platforms’ (META-Q -10.59%) shares fell 13% on Thursday, causing a sell-off in large technology firms as the social network company hinted that the return on its expensive AI wager would take years.
The decline was expected to wipe out around $170 billion from the company’s market worth. It also caused shares of AI-focused Microsoft MSFT-Q -2.57%decrease and Alphabet GOOGL-Q -1.99%decrease, which both release earnings after market close, to plunge by 3% to 4.2%.
However, the emphasis on investing on AI led to a more than 2 percent boost in the shares of Marvel Technology, Broadcom (AVGO-Q +3.19% increase), and Nvidia (NVDA-Q +3.84% increase), which experts have dubbed the “picks and shovels” of the generative AI boom. Intel was up 0.7% ahead of earnings despite missing out on the AI-driven rise.
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Before the firm generates “much revenue” from some of its AI products, costs will climb “meaningfully” during the next few years, according to Meta CEO Mark Zuckerberg, who stunned Wall Street last year with his cost-cutting push.
This heightened investor concerns that Zuckerberg was pushing Meta into yet another expensive project at a time when the company’s augmented and virtual reality division was suffering billion-dollar quarterly losses.
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Increased capital expenditures took investors by surprise, and this was made worse by a somewhat lower revenue estimate for the second quarter. Consequently, shares are moving into the “penalty box,” according to analysts at Baird Equity Research.
On Wednesday, Meta increased the lower end of its 2024 total spending prediction by $2 billion while projecting revenue for April through June that was below projections. In an effort to catch up to Microsoft and OpenAI, the leaders in artificial intelligence, it has also increased the top end of its capital expenditure outlook by investing in data centers.
The somber projections come after a string of phenomenal profits that saw Meta’s shares nearly treble in 2023 and propel the largest one-day market value gain of any firm in Wall Street history—$192 billion—in February following its first payout.
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Even so, a number of experts expressed optimism about the expenditures, citing AI-driven engagement on material like Instagram Reels, the strong reaction for its virtual assistant Meta AI, and the early iterations of its most recent large language model, Llama 3.
“We believe that this occasion is unique,” analysts at Evercore ISI stated. “This investment cycle is starting from a strong position, as management sees improving user engagement and a healthy environment for ad demand into Q2.”
Based on LSEG data, 13 analysts increased their price target for the stock, while 19 analysts decreased theirs. At $525, the consensus price objective is currently 6% higher than it was at the previous close.
In comparison to Microsoft’s 31.17 and Alphabet’s 22.07 price-to-earnings ratios, the stock has a 12-month ahead ratio of roughly 23.12. It has increased by almost 40% so far this year, handily outpacing the benchmark S&P 500 index’s 6% gain.
According to Bernstein analyst Mark Shmulik, “going all out with investment spending is generally great, but in the internet it is very hard to underwrite which of those investments will pay back and when.”
In the end, investors are left wondering how long this cycle of investments will go and whether the opportunity and reward are genuine against the backdrop of slowing GDP.
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