Meta Platforms Soars on AI Prowess, But Spending Concerns Linger
Meta Platforms Inc (META) is riding high on the wave of its artificial intelligence (AI) advancements, with analysts raising price targets following the company’s strong second-quarter earnings report. While the AI initiatives are fueling optimism, concerns about increased spending remain a point of contention.
Key Takeaways:
- AI Fuels Growth: Analysts highlight the impact of AI on Meta’s core businesses, boosting advertising revenue and driving user engagement.
- Spending Concerns: Concerns about higher capital expenditure (capex) due to AI and metaverse investments persist, prompting some analysts to caution investors.
- Competition Heats Up: While Meta faces competition from platforms like TikTok, the company’s size and user base are seen as advantages in the AI race.
- Unlocking New Revenue Streams: Meta’s AI efforts are expected to open up new revenue streams beyond traditional advertising, with its generative AI models like Meta AI and AI Studio showing early promise.
- Bullish Outlook: Despite spending concerns, the majority of analysts maintain bullish outlooks on Meta, citing its AI leadership, strong user base, and potential for long-term growth.
AI: The Engine of Growth for Meta Platforms
Meta’s second-quarter earnings report showcased the company’s commitment to AI, with positive results already evident across its platforms.
KeyBanc’s Justin Patterson emphasizes the "meaningful" returns generated by AI, stating, "We believe Meta is investing aggressively in AI, which should improve the core business and open up new opportunities over time." Patterson predicts that AI will drive further share gains and support consistent advertising revenue growth.
RBC Capital Markets’ Brad Erickson also acknowledges the impact of Meta’s AI initiatives, asserting, "Meta’s various AI applications are aiming to materially expand its utility for both users and the businesses that want to connect with those users." He sees these initiatives as creating a "veritable moat" for Meta in a world where technology can quickly dismantle traditional moats.
Truist’s Youssef Squali highlights the positive impact of AI on advertising revenue, saying, "AI-driven recommendation & ranking algos are already driving higher ad conversion and pricing." He believes Meta is well-positioned to leverage its AI investments across its platforms for long-term growth.
Roth MKM’s Rohit Kulkarni commends Meta’s leadership in AI, stating, "Zuck won AI bingo before the game started, and this time the AI excitement was backed up by performance gains and monetization efficiency." Kulkarni points to Meta’s successful implementation of AI leading to growth that outpaces its mega-cap peers.
The Balancing Act: Growth vs. Spending
While the potential of AI is clear, concerns about Meta’s increasing spending are unavoidable.
Needham’s Laura Martin raises a flag of caution, warning that "expenses and CapX ests. will rise faster than consensus ests. during 2025, driven by GenAI and Metaverse investments." This, she believes, could threaten the company’s return on invested capital.
Stifel’s Mark Kelley acknowledges the significant increase in capex but believes Meta’s AI initiatives are already yielding positive results. "It’s hard to deny the increase in Capex is material, but we believe Meta’s AI initiatives are paying off already," he states, emphasizing the positive impact on engagement and advertiser tools.
JPMorgan’s Doug Anmuth supports Meta’s ambitious spending on generative AI, stating, "Meta is showing early signs of progress across its AI ambitions, including core product enhancements around content & ads, new products such as MetaAI & the Metaverse." He believes the company’s scale, growth, and profitability place it in a "rarified air" position for long-term success.
Navigating a Competitive Landscape
Meta navigates a fiercely competitive landscape, with TikTok as a prominent challenger.
BMO Capital Markets’ Brian Pitz points to advertisers shifting spending away from TikTok as a potential benefit for Meta. He observes, "Our ad checks indicate advertisers are already reducing ad spending budgets on TikTok by 15%-30% ahead of potential legislation in Sept." He believes Meta may have benefited from this trend in the second quarter and anticipates potential gains in upcoming quarters.
Despite the competition, analysts agree Meta’s scale and user base give it a significant advantage in the AI race.
AI, Beyond Advertising
Meta’s AI ambitions extend beyond optimizing advertising revenue to new potential revenue streams.
Goldman Sachs’ Eric Sheridan points to the company’s momentum in key new products like MetaAI and AI Studio. He believes conservative estimates could be proven wrong as these AI products generate revenue.
Bank of America’s Justin Post goes further, declaring, "We see Meta as the top AI play in consumer internet." He cites Meta’s leading infrastructure, LLM capabilities, and growing app usage, as well as the potential for Gen-AI, as strong indicators of its future success.
A Balancing Act: AI, Spending, and the Future
Meta faces a balancing act between investing in AI-driven growth and managing spending. While the company is taking bold strides in AI, concerns about the pace of investment remain. The coming quarters will be crucial for Meta to demonstrate the effectiveness of its AI initiatives and reassure investors about its long-term financial strategy. Nevertheless, the company’s commitment to AI, combined with its scale and user base, position it as a strong contender in the evolving landscape of technology and innovation.
