Meta and Reasonable Doubt

🌈 Abstract

The article discusses Meta Platforms Inc.'s (Meta) recent earnings report and the market's reaction to it. It analyzes Meta's increased capital expenditures, particularly for AI investments, and compares it to the spending of other tech giants like Google and Microsoft. The article also examines Meta's advertising business cycle and long-term prospects, including the relationship between AI and the Metaverse.

🙋 Q&A

[01] Meta's Short-Term Capex Costs

1. What is the consistent theme across the big tech earnings calls last week? The consistent theme is that these companies are spending heavily, particularly on AI and cloud infrastructure. Google, Microsoft, and Meta all reported significant increases in capital expenditures to support their AI initiatives.

2. How did the market react differently to the increased spending by Microsoft and Google compared to Meta? The market reacted positively to Microsoft and Google's increased spending on AI and cloud, as their results showed the investments were paying off. In contrast, the market reacted negatively to Meta's increased spending, sending the stock price down significantly.

3. Why is Microsoft better positioned than Meta to benefit from AI in the short-term? Microsoft has a cloud business in Azure that sells AI services to enterprises, and an enterprise software business that can expand its average revenue per user by selling AI services. These clear opportunities for monetization, along with the potential upside of AI generally, make investors more optimistic about Microsoft's additional capex investment.

4. How does Google benefit from AI, particularly in terms of Google Cloud? Google can expand the average revenue per user with existing cloud customers and use AI as a wedge to win new customers, who may then shift more of their cloud spending to Google Cloud. The consumer story is more complicated, but there are still benefits in terms of improved recommendations, better ad targeting, and generative advertisements.

5. Why doesn't Meta have as many clear short-term revenue opportunities from its AI investments compared to Microsoft and Google? Meta does not operate a cloud business, so no one is consuming or paying for the use of Meta's AI-related capex other than Meta itself. The short-term upside for Meta's consumer products is not as clear as it is for Microsoft and Google.

[02] Meta's Advertising Cycle and the Mid-Term

1. What is the consistent theme in Meta's advertising business cycle? The growth in impressions is usually inversely correlated with the growth in price-per-ad. When impressions growth drops, the price-per-ad increases, and vice versa.

2. How is the current situation different from previous advertising business cycles for Meta? This time, impressions growth is declining, meaning that price-per-ad is the primary route for revenue growth. This is a less bullish moment for Meta's advertising business compared to past stock drops, as it opens the door for more competition.

3. What are the uncertain long-term revenue opportunities that Zuckerberg discussed for Meta AI? Zuckerberg mentioned the potential for ads and paid content in Meta AI interactions, as well as people paying for larger models, more compute, or premium features. However, the long-term revenue opportunity is not as clearcut as it was for products like Stories and Reels.

[03] Meta's Long-Term Prospects

1. How does Zuckerberg see the relationship between AI and the Metaverse? Zuckerberg believes that an increasing amount of Reality Labs' work is going towards serving Meta's AI efforts, and that the Metaverse should be the internal Meta AI customer that necessitates and monetizes huge amounts of AI capacity.

2. What is the real question for Meta shareholders regarding the company's long-term prospects? The real question is whether shareholders trust Zuckerberg's leadership and ability to execute on the company's big bets, such as the Metaverse, which may be critical to the long-term upside of Meta's AI investments.

3. What is the author's view on the bet worth making for Meta shareholders? The author believes that the bet on Zuckerberg is still worth making, as Meta has met previous challenges and is making the right strategic moves, even as it doubles down on AI. However, these are big bets, and the author understands reasonable doubt in the meantime.