How Meta Eased Wall Street’s Worries About AI Spending

Meta (META) shares jumped on Thursday as the company’s second-quarter results eased some of Wall Street’s fears about overspending on artificial intelligence. 

Meta on Wednesday reported capital expenditures (CapEx) increased 33% in the second quarter to $8.17 billion. It also raised the low end of its 2024 CapEx forecast to $37 billion from $35 billion. It left the upper band of its forecast range at $40 billion. 

The company joins a chorus of big tech companies saying they’ve dramatically increased their spending on AI infrastructure and expect to invest even more next year. Alphabet (GOOGL) and Microsoft (MSFT) increased CapEx by 91% and 55%, respectively, in the second quarter. 

But the market reacted very differently to each company’s CapEx outlook, a reflection of how quickly the narrative surrounding AI can change on Wall Street. 

Alphabet, Microsoft Spend Big on AI

Alphabet stock slumped last week as investors digested its surging AI spending and YouTube advertising revenue that fell slightly short of expectations. “The risk of underinvesting is dramatically greater than the risk of overinvesting for us here,” said CEO Sundar Pichai of the company’s CapEx on a call with analysts. Still, the results amplified Wall Street’s worries about big tech’s spending spree and helped spark the sector’s most painful sell-off in more than a year. 

Microsoft shares initially plummeted when its cloud unit slightly missed estimates—revenue grew 29% rather than the 30% Wall Street expected—and full-year CapEx came in at $69 billion, up 60% from the prior year.

But the stock recovered most of its losses to close down just 1% on Wednesday after CFO Amy Hood made a compelling case for all that spending. Cloud revenue was hamstrung, she said, by a combination of economic softness in Europe and “capacity constraints,” or Microsoft’s inability to meet AI demand with its existing infrastructure.

That was welcome news on Wall Street. “I think they kind of put to rest a lot of the concerns out there,” said CFRA analyst Angelo Zino of Microsoft’s forecast that investments would help it reaccelerate cloud growth in the first half of the next calendar year.

What Did Meta Do Differently?

Markets may also be shrugging off Meta’s CapEx spending because of the relative clarity of its AI strategy, Zino says. 

CEO Mark Zuckerberg opened Meta’s earnings call by explaining how AI currently fits into the company’s core ad business and what he thinks lies ahead. That included AI Studio, with which users can create their own AIs to integrate with Meta’s platforms, and Business AIs that could eventually act as customer service reps or salespeople.  

“We have an exciting roadmap ahead of things that we want to add, but the bottom line here is that Meta AI feels like it is on track to be an important service and it’s improving quickly both in intelligence and features,” Zuckerberg said, according to a transcript provided by AlphaSense.

“Zuckerberg gave a pretty good story in terms of the growth opportunities tied to AI,” Zino says. 

Meta also has what Zino described as an “easier” AI story than some of its hyperscaler peers. “Alphabet is a lot messier of a story these days because of the uncertainty about the search business,” Zino said. 

And much of the simplicity of that story stems from Meta being able to point to concrete benefits of its AI investments. AI, the company says, has increased engagement across its family of apps by improving content recommendations. That helped the company increase revenue by 20% in the second quarter, driven in equal measure by higher ad impressions and higher ad prices.

“You’re seeing it in terms of growth numbers. This company is growing well above the pace of the broader digital ad market and essentially all of its competitors,” says Zino.