At a Glance
- Meta’s stock experienced a significant drop following its Q3 earnings report, where the company announced increased AI infrastructure spending for the remainder of 2024 and through 2026.
- CEO Mark Zuckerberg defended the increased investment, citing rising demand for AI tools and the historical pattern of underestimating compute needs.
- Several Wall Street analysts responded by cutting their price targets for Meta’s stock, indicating concern over near-term financial pressures despite maintaining positive long-term ratings.
- The company reported a positive annual run rate of $60 billion for its AI-powered advertising tools, but this was overshadowed by a $4 billion loss from the Reality Labs segment.
- Meta’s stock performance is currently trailing the S&P 500, highlighting investor concerns about the balance between AI investment costs and profitability.
Meta’s Stock Dips on Increased AI Investment Forecast
Meta Platforms saw its stock value decline by over 11% by the close of trading on Thursday. This market reaction followed the company’s announcement during its third-quarter earnings report, detailing plans to substantially increase spending on artificial intelligence infrastructure through 2026.
Investors reacted swiftly to the news, leading to a sell-off as the market processed the implication of higher future costs without immediate returns. The immediate sell-off signals a cautious sentiment from the market regarding the company’s strategic investment decisions.
CEO Mark Zuckerberg explained the rationale behind the increased investment, stating that Meta is building more computing power to address the growing demand for AI tools across its core business. He drew parallels to past experiences where initial infrastructure estimates proved insufficient.
We build some amount of infrastructure to what we think is an aggressive assumption, and then we keep on having more demand to be able to use more compute, especially in the core business, Zuckerberg remarked during the earnings call.
💡 Zuckerberg acknowledged the possibility of overshooting the required compute resources, noting that any excess capacity would be absorbed and utilized for future needs. He indicated that both internal teams and external partners are already requesting access to Meta’s infrastructure, suggesting that even surplus capacity could find applications over time.
Analyst Reactions and Price Target Adjustments
The company’s projection did not fully alleviate market concerns, as the strategy of investing heavily upfront with the expectation of future demand did not sit well with many investors and analysts. This led to immediate adjustments in price targets by several financial institutions.
BofA Global Research analyst Justin Post revised Meta’s price target downward from $900 to $810, while maintaining a Buy rating. Similarly, KeyBanc’s Justin Patterson lowered his target from $905 to $875, keeping an Overweight rating on the stock.
John Blackledge from TD Cowen reduced his price target from $875 to $810, also retaining a Buy recommendation. Other analysts, including Brian Nowak of Morgan Stanley, Eric Sheridan of Goldman Sachs, Ron Josey of Citi, and Deepak Mathivanan of Cantor Fitzgerald, also decreased their targets but generally kept Buy or Overweight ratings, suggesting a continued belief in Meta’s long-term value despite near-term financial pressures.
📌 Not all analysts made adjustments; Nicolas Cote-Colisson of HSBC maintained his $905 target, and Scott Devitt of Wedbush left his target unchanged, indicating differing perspectives on the impact of Meta’s investment strategy.
Financial Performance Highlights and Concerns
On a more positive note, Meta highlighted that its AI-powered advertising tools now generate an annual run rate of $60 billion. This figure demonstrates that the company’s AI investments are contributing to revenue generation.
However, this positive revenue stream did not entirely offset concerns regarding the rapid escalation of spending. The company also reported a significant loss of $4 billion from its Reality Labs segment, which continues to incur substantial costs without immediate signs of profitability.
Mike Proulx, Forrester’s vice president and research director, commented on the mixed results, stating, Unfortunately, Meta’s strong revenue and user growth in Q3 is tainted by significantly increased costs across the board. He added, True to form, Meta’s Reality Labs continued its streak of losses with no signs of slowing down.
📊 Currently, Meta’s stock performance is lagging behind the broader market. Year-to-date, Meta shares have risen by 15%, with a 14% increase over the past 12 months. In comparison, the S&P 500 has seen a 16% year-to-date gain and an 18% rise over the last year, indicating a slower growth trajectory for Meta relative to the market.
Expert Summary
Meta’s recent earnings report revealed a strategic pivot towards significant AI infrastructure investment, a move that led to a notable stock price decline. While the company highlighted growth in AI-driven advertising revenue, substantial losses from Reality Labs and increased anticipated spending have prompted analysts to revise price targets downwards, signaling investor caution regarding near-term financial stability.