Meta can simultaneously fuel its own AI ambitions and rent out its scarce computing capacity to bolster returns, CEO Mark Zuckerberg signaled earlier this week. The problem is: investors aren’t buying it. The Instagram owner is splurging billions to build compute — chips, servers, energy and data centers that power AI — leaving it with free cash flow of just $784mn in the second quarter to run and grow its business. That collapse, of 91% from a year ago, drove its stock down more than 9% on Thursday.
Pressed by analysts for details on Meta’s plans, Zuckerberg framed compute as a scarce strategic asset that the company should keep and build around, rather than simply sell for short-term profit. But he acknowledged that the company had received a number of offers for its computing capacity from businesses that wanted to deploy their own AI plans “at a meaningful premium” over what it invested to build that capacity.
That tension sits at the heart of Meta’s challenge in diversifying its revenue stream. Renting out compute could ease Meta’s cash-flow squeeze, but would also divert scarce resources from its own push to build AI models and services. Having built its fortune selling ads on Facebook and Instagram, the company is now trying to take on larger rivals including Microsoft, Alphabet and Amazon that have deep ties to enterprises, an early and lucrative market for AI.
Microsoft on Wednesday showed how its AI bets were paying off even as its free cash flow fell 23%. The Windows maker breezed past expectations for growth in its Azure cloud unit and Copilot assistant thanks to a huge base of corporate customers and its early AI build-out, sending its stock up over 13%.
“We believe that there will continue to be a significantly higher margin on selling intelligence rather than selling compute directly, but we think that there’s a big opportunity obviously to sell compute as well,” he said, as he painted a picture of what Meta hopes to build with its AI spending spree.
Zuckerberg argued that AI-powered personal assistants could become a mass-market product used by billions of consumers, while business agents could eventually help companies handle customer service, sales and marketing. But beyond broad references to subscriptions and enterprise services, he offered few specifics on how those businesses would justify Meta’s massive AI spending.
Responding to a question from J P Morgan analyst Doug Anmuth, who noted that Meta was also purchasing capacity from third parties while selling compute, Zuckerberg said Meta was intentionally investing ahead of demand.
“There is a lead time where we’re investing in building out these data centers now. They come online at some point in the future. You obviously are not getting value out of them until they’re online,” he said.
“Meta is spending like a hyperscaler without a hyperscaler’s business model,” said Josh Gilbert, online investing platform eToro’s lead APAC analyst, referring to large cloud companies. “Microsoft, Alphabet and Amazon can point their data centre dollars at cloud businesses that sell compute straight back out the door, but
Meta doesn’t have the same outlet, so every dollar of build-out leans on the ads business.”
Meta’s massive AI spending push has unnerved some investors, who are drawing parallels to the company’s costly pivot to the metaverse — a bet that racked up tens of billions of dollars in losses without becoming a large revenue generator.Its free cash flow slump in the April-June quarter was the steepest since late 2022, when the metaverse bet attracted similar investor scrutiny. Still, Meta raised the low end of its capital spending forecast by $5bn, lifting the range to between $130bn and $145bn.