Critics argue AI revenue must grow exponentially to justify investment. However, for incumbents like Meta, this isn't net-new revenue. It's a massive internal budget shift from established products to new AI features, redirecting existing user engagement and spend rather than creating a market from scratch.
Related Insights
In 2022, investors punished Meta's stock for its Reality Labs CapEx. Today, the market applauds even larger AI-related spending (66% of MAG-5's operating cash flow). This signals a fundamental belief that AI investments translate directly to tangible near-term earnings, unlike speculative bets like the Metaverse.
While increased CapEx signals strength for cloud providers like Microsoft and Google (who sell that capacity to others), the market treats Meta's spending as a pure cost center. Every dollar Meta spends on AI only sees a return if it improves its own products, lacking the direct revenue potential of a cloud platform.
While the market seeks revenue from novel AI products, the first significant financial impact has come from using AI to enhance existing digital advertising engines. This has driven unexpected growth for companies like Meta and Google, proving AI's immediate value beyond generative applications.
The true financial windfall from AI won't come from hyped, "AI-native" companies like OpenAI. Instead, established giants like Meta and Amazon will generate massive shareholder value by applying AI to optimize their existing, scaled operations in areas like ad targeting, logistics, and robotics.
Meta's huge AI capex, despite no hit product yet, is based on proprietary data from its massive platform. Unlike the speculative Metaverse venture, this investment is a direct response to observed exponential growth in user engagement with AI content, even if users publicly claim to dislike it.
Meta's stock soared because it demonstrated how AI investments are already improving ad revenue. In contrast, Microsoft hasn't yet proven that its AI integrations are driving significant new revenue from core products like Office. The market is rewarding immediate, measurable AI impact over long-term platform plays.
An analyst categorizes large tech companies into AI "laggards, tweeners, and darlings." Tweeners, like Amazon and Meta, are in a precarious catch-up position. Unlike darlings, they must make significant investments and organizational shifts to improve their AI models and monetization, signaling a period of higher spending and strategic refocusing.
While the market awaits new AI-native products from Meta, its real AI success is in its core business. A 9% CPM increase in a weak economy indicates its ad-serving algorithm's effectiveness improved by double digits in a single quarter, a massive financial win.
During a technology shift like AI, if the trend proves real, companies that failed to invest risk being permanently left behind. This forces giants like Microsoft and Meta into unprecedented infrastructure spending as a defensive necessity.
Meta is no longer the capital-light business it once was. Its massive, speculative spending on the Metaverse and AI—where it is arguably a laggard—makes future returns on capital far less certain than its historical performance, altering the risk profile for investors.
