Meta's Ad Business Lifts Sales, But AI Costs Rise

"Meta Platforms on Wednesday reported record first-quarter revenue as the company's advertising business grew at a rapid clip even as investors soured on forecasts of rising costs related to artificial intelligence.

In aftermarket trading, Meta shares fell 16% after the Facebook parent said it would increase its spending levels for the year by as much as $10 billion to support infrastructure investments to support its AI investments.

The stock-price decline came despite an increase in sales to $36.5 billion, up 27% from a year prior, a record for the January-to-March period, exceeding analysts' expectations. The revenue growth was up slightly compared to a quarter prior, when Meta reported annual revenue growth of 25%.

The company hopes to build the world's leading AI service in terms of quality and usage, and Meta will continue to expand its investments in AI meaningfully before those efforts begin contributing revenue, said Chief Executive Mark Zuckerberg. He added that this is the same playbook the company has employed with past features and products, such as News Feed, Stories and Reels.

"Once our new AI services reach scale, we have a strong track record of monetizing them effectively," said Zuckerberg, adding that Meta could generate revenue through ads in AI interactions, charging people to use its larger AI models and by simply improving app engagement and the quality of ads.

Meta's performance has been fueled by breakthroughs in artificial-intelligence technology that boosted its ad-targeting capabilities. Those advancements in AI have helped Meta overcome challenges posed by privacy changes implemented by Apple that erased $10 billion of revenue for the social-media company in 2022.

In April, Meta released its latest large language model, Llama 3, and announced that it would begin featuring the technology more prominently in apps including Instagram and WhatsApp. Llama 3 is capable of instantly generating images and providing users with article summaries.

After the company moved to reduce costs significantly in what Chief Executive Mark Zuckerberg called a "year of efficiency" in 2023, investors grew concerned about the risks of Meta's heavy investments in AI, said Paul Marino, chief revenue officer of GraniteShares, an issuer of exchange-traded funds focused on Meta and other widely traded tech stocks.

The release of Llama 3 has put the company in a strong position, but shareholders want to see higher revenue if the company increases expenses, he said.

The release of Llama 3 comes as Silicon Valley's AI race continues to heat up as Google, OpenAI and startups such as Anthropic and Mistral compete to deliver popular AI products and chatbots.

Shareholders are enthusiastic about the potential of AI but are also scrutinizing how much companies are spending to build out AI models and applications as well as the strategy for making money on the new technology." [1]

1. Meta's Ad Business Lifts Sales, But AI Costs Rise. Rodriguez, Salvador.  Wall Street Journal, Eastern edition; New York, N.Y.. 25 Apr 2024: B.1.