RESOLVING THE LEDGER
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Meta's financial metrics have taken a notable punch due to its AI spending.
In the company's earnings report on Wednesday, Meta executives shared that free cash flow for the past quarter was down to only $784 million, a major drop compared to the $8.55 billion number for the same time period last year. Revenue for the entire fiscal year is also looking likely to come below market expectations.
Meta is the second AI hyperscaler in a week to receive investor wrath for struggling free cash flow. Last week, Google reported negative free cash flow due to the money it was pouring into AI, a first in company history.
The tech giants claim the combined trillions of dollars they are pouring into AI is warranted to address a surge in demand. But experts have been growing weary of these promises, fearing that the investment is potentially overestimating how fast that demand will materialize, a scenario that, if true, could point to a potential AI bubble.
Analysts had been expecting bad news on the free cash flow front for some time now, considering the eye-watering financial commitments the AI hyperscalers have been announcing in the past two rounds of big tech earnings. Google validated some of those fears last week, and Meta made matters worse on Wednesday.
"I get that this is sort of a big bet across the industry," CEO Mark Zuckerberg said of AI investment in the company's earnings call. "My personal bet is that the people who invest in this are going to be rewarded and feel very good over time."
Meanwhile, Zuckerberg's last big bet, the company's Reality Labs unit, lost $4.62 billion in the last quarter. The unit, which started as the driving force of Zuckerberg's shift to the Metaverse, has generated more than $80 billion in total operating losses in roughly 6 years.
Zuckerberg thinks that the AI investment is already "paying off." For example, Meta said that it is now using LLM technology to improve its ad rankings and algorithms in the company's social media platforms.
"Earlier this year, we reached a milestone of every public Reels and Feed post on Instagram being automatically processed through an LLM and analyzed across dimensions from topic to tone," Meta CFO Susan Li said in the earnings call.
Company executives also spent the call promising a strong AI product pipeline soon, from Meta glasses to "agents that can work 24/7 on your behalf." Zuckerberg thinks that the popularity of AI agents can move beyond the coding world into everyday consumer use.
"The first domain that agents have really taken off in is coding, but engineers are more technical and willing to spend time making those agents work," Zuckerberg said. "So, to build great personal agents, this needs to be a great consumer product that just works out of the box and is easy enough for billions of people to adopt and use. I'm very excited about this, and we're going to have more to share soon."
But even if Meta's AI concerns resolve in Zuckerberg's favor, Meta is also bracing for trouble on the legal side. The company said that it spent $2.4 billion "in charges related to legal proceedings" in the past quarter. The company is fighting a barrage of lawsuits, with accusations that include allegedly using discriminatory AI to decide who would be laid off in a brutal restructuring earlier this year. But the bulk of those lawsuits have to do with the impact Meta's social media platforms have on kids and teens. Most of those lawsuits have to do with addictive design features that plaintiffs say were knowingly put in place to get children addicted to social media from a young age, leading to worse mental health outcomes down the line.
One of those social media addiction lawsuits is being brought against Meta by four states, California, New Jersey, Colorado and Kentucky. Earlier this month, Meta unveiled in a court filing that the states' claims could cost the tech giant $1.4 trillion in damages. As of Wednesday night, the company's market valuation was a little less than $1.5 trillion.
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