Meta Platforms Faces Rising AI Infrastructure Costs

By Katie Paul, Akash Sriram
(Reuters) – Meta Platforms (NASDAQ:META) warned on Wednesday of a "significant acceleration" in artificial intelligence-related infrastructure expenses next year, even as it surpassed analysts' estimates for third-quarter revenue and profit.

The results sent mixed signals to investors regarding the sustainability of digital ad sales from Meta's core social media business in light of its significant AI investments.

Shares of the company, based in Menlo Park, California, dropped 2.9% in after-hours trading.

"Meta needs to prove it can cover its AI costs, as any weakness in its ad business may increase investor anxiety about returns from its AI investments," said Jasmine Enberg, principal analyst at Emarketer.

Like other Big Tech companies, Meta has invested heavily in data centers to take advantage of the generative AI boom. Unlike cloud service providers, however, it does not anticipate immediate revenue from these investments, making it more susceptible to investor scrutiny regarding spending.

CEO Mark Zuckerberg acknowledged during a conference call with analysts that increased infrastructure spending might not be what investors want to hear in the short term, but he emphasized the potential opportunities available.

Zuckerberg announced that Meta AI, a generative AI chatbot that can create images and respond to questions, has grown to over 500 million monthly active users, up from 400 million reported in September.

In the third quarter, the world's largest social media company controlled its costs, reporting total expenses of $23.2 billion and capital expenditures of $9.2 billion. It also narrowed its total expense forecast for the year to between $96 billion and $98 billion.

Nonetheless, a warning was issued regarding a "significant acceleration" in growth of infrastructure expenses next year due to increased depreciation and operational costs of its expanded infrastructure.

Investors have expressed caution over Meta's spending, particularly following an April disclosure of higher-than-expected expenses, resulting in a $200 billion drop in market value. This disruption halted a series of strong quarters for Meta, which previously had rebounded from a stock crisis in 2022 by reducing its workforce, embracing AI excitement, and issuing its first dividend earlier this year.

Meta's shares have surged about 500% from their lowest point and are up around 67% this year.

On Wednesday, analysts inquired about Meta's workforce, which included 72,404 employees compared to 66,185 in the same quarter last year. CFO Susan Li indicated that Meta aims to enhance efficiency, particularly in sectors still hiring.

The earnings report followed satisfying results from digital ad leaders Alphabet (NASDAQ:GOOGL) and Snap, which exceeded third-quarter revenue estimates due to an increase in AI-assisted ad sales.

Meta posted a profit of $6.03 per share for the third quarter, surpassing estimates of $5.25. Revenue hit $40.59 billion, compared to analyst estimates of $40.29 billion. The company also projected fourth-quarter revenue between $45 billion and $48 billion, above estimates of $46.31 billion.

Advertising generates most of Meta's revenue, so increased marketing spend from retailers and other businesses during the holiday season could significantly impact the company's bottom line, analysts noted.

In the third quarter, Meta's daily active users (DAUs) grew 5% to 3.29 billion. This growth follows a 7% increase in the previous quarter, reaching 3.27 billion.

The company remains well-positioned to enhance revenue from its user base despite slower growth, thanks to AI tools that tailor content to individual interests, Enberg added.

Meanwhile, the Reality Labs division, which develops Quest virtual reality headsets and smart glasses in collaboration with EssilorLuxottica's Ray-Ban, reported a loss of $4.4 billion in Q3, narrower than analysts' projections of a $4.7 billion loss.

Looking ahead to 2025, executives expressed enthusiasm about investments in Reality Labs, particularly surrounding smart glasses, which appear to have garnered strong consumer interest.