Meta embodies everything Wall Street hates about AI right now

By Hannah Pedone

Meta is increasing spending faster than revenue, and some on Wall Street aren't sure that the company's investments will pay off

Shares of Meta were down nearly 10% on Thursday morning.

Meta Platforms has become the poster child for Wall Street's impatience with ever-increasing artificial-intelligence spending.

Some analysts say that the company's latest revenue figures fail to justify its level of spending growth. And while Meta (META) isn't the only Big Tech company in that boat, it has a more uncertain pathway to seriously monetize artificial intelligence through enterprise use cases, which are thought to be potentially more lucrative than consumer applications.

Meta's stock was down nearly 10% on Thursday morning.

The company reported revenue of $56.3 billion for the first quarter, a 33% increase from the prior year quarter.

Yet Meta is being punished for various elements of its spending. Capital expenditures grew 45% in the first quarter, inclusive of finance leases, outpacing the rate of revenue growth. And Meta increased its guidance for capital expenditures to a range of $125 billion to $145 billion, up from a forecast of $115 billion to $135 billion before.

MoffettNathanson analyst Michael Nathanson said that Meta's higher capex is viewed to be more "speculative," whereas Alphabet's, for instance, is supported by growth in the Google parent company's cloud backlog.

J.P. Morgan analyst Doug Anmuth was encouraged by Meta's increased advertising revenue, although he expects sales growth to decelerate throughout the year and sees a more "challenging" path to returns outside of advertising.

He downgraded shares of Meta from overweight to neutral on Thursday.

The lack of meaningful revenue opportunities outside of advertising is a chief investor concern. Nathanson also emphasized that while Meta has "provable success" in advertising - the company just posted 29% in advertising revenue growth, its highest rate since the first quarter of 2021 - the company is also pouring money into MetaAI and Meta Superintelligence Labs, even as it's unclear if the company will be able to demonstrate a good return on investment there.

Read more: Meta plans to cut 10% of workforce, or 8,000 jobs, as it doubles down on AI

Meta has an intriguing new AI model called Muse Spark, but Oppenheimer analyst Jason Helfstein wrote that it may have trouble competing against other models like ChatGPT, Gemini, Claude and Grok.

The company still "operates from a lagging position" compared with frontier-model competitors, despite making progress with the launch of Muse Spark, BMO Capital Markets analyst Brian Pitz added.

That said, he sees a number of other ways the company could monetize its investments. Meta could see traction with AI agents or benefit from the development of its custom chips, he noted.

Meta is planning an investment-grade bond sale, according to a filing released on Thursday. Bloomberg reports that the company is looking to take on between $20 billion and $25 billion in debt through this deal. The company raised $30 billion through an October offering. Meta did not immediately respond to a request for comment.

See also: Zuckerberg is following Musk's lead with this 'transformative step' in outer space

-Hannah Pedone

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