Meta's AI Costs Leap As Its Ad Sales Gain

"Meta Platforms on Wednesday said quarterly digital advertising grew rapidly while the company's investments in artificial intelligence and the so-called metaverse weighed on profits.

The company's rising expenses have come as a result of the company's all-in approach toward capitalizing on the AI boom sweeping the tech industry. Meta increased its minimum spending guidance for 2024, and its capital expenditures surged about 33% after the company said in April that costs would rise by up to $10 billion for infrastructure investments to support its AI ambitions.

"Meta AI is on track to be the most used AI assistant in the world by the end of the year," said Chief Executive Mark Zuckerberg.

Meta released its latest large language model, Llama 3.1, last week, and it made Meta AI available in more languages and markets. Zuckerberg said the amount of computing resources required to train Llama 4 will likely be almost 10 times more than what Meta used to train Llama 3. Future models will grow beyond that, he said.

"At this point, I'd rather risk building capacity before it is needed rather than too late given the long lead times for spinning up new inference projects," Zuckerberg said.

Shares rose by about 5% in after-hours trading, suggesting that improved sales forecasts and profits outweighed concerns about spending increases for investors.

Meta's peers met with a different reaction. Microsoft and Google parent Alphabet saw their share prices dip as they reported rising AI costs.

Meta's shares have risen by almost 50% in the past 12 months, a rally fueled by breakthroughs in artificial-intelligence technology that have improved its ad-targeting capabilities. Those advancements in AI have helped Meta overcome challenges posed by privacy changes implemented by Apple in 2021 that erased $10 billion of revenue for the social-media company in 2022.

The company's sales increased to $39.1 billion, up 22% compared to a year prior. The revenue growth was down compared to the January-to-March period, when Meta reported annual revenue growth of more than 27%. Advertising made up 98% of Meta's second-quarter revenue.

Third-quarter revenue is expected to be between $38.5 billion and $41 billion, ahead of analyst expectations of $38.3 billion, according to FactSet data.

Operating losses in Meta's Reality Labs unit, which produces the Quest headset and Ray-Ban Meta smart glasses, are set to increase "meaningfully" in the remainder of 2024 as Meta continues to build out software and hardware. Zuckerberg has for years extolled the virtues of a metaverse, or a virtual space where he expects people to work and spend time in the future. The division had an operating loss of $4.5 billion for the period.

The company announced that it is raising its forecast for its minimum 2024 capital expenditures from $35 billion to at least $37 billion, but it maintained its maximum forecast for expenditures at $40 billion.

Overall, Meta posted a net profit of $13.5 billion for the second quarter. That was up about 73.1% compared with the net profit that the company posted for the same period in 2023." [1]

1. Meta's AI Costs Leap As Its Ad Sales Gain. Rodriguez, Salvador.  Wall Street Journal, Eastern edition; New York, N.Y.. 01 Aug 2024: B.1.