Meta Platforms (META.O) saw its shares tumble by 13% on Thursday, leading to a broad decline in major tech stocks. This occurred after the company indicated that its substantial investment in AI might not yield financial returns for several years.
This significant drop in share price was poised to wipe out almost $170 billion from Meta’s market valuation and led to a decline of between 3% and 4.2% in AI-focused companies like Microsoft (MSFT.O) and Alphabet (GOOGL.O), both of whom were set to report their earnings after the market closed.
Conversely, companies like Nvidia (NVDA.O), Broadcom (AVGO.O), and Marvel Technology (MRVL.O), which are considered vital suppliers in the AI boom, experienced a surge of over 2% in their shares. Intel (INTC.O), however, which had not significantly benefited from the AI boom, saw a modest increase of 0.7% before its earnings announcement.
During a post-earnings call, Meta CEO Mark Zuckerberg indicated that the company’s expenses would significantly increase over the next few years before seeing substantial revenue from its AI initiatives. This revelation intensified investor concerns about Meta engaging in another expensive venture, especially as its augmented and virtual reality divisions were already losing billions every quarter.
The unexpected rise in capital expenditures and a lower than anticipated revenue forecast for the second quarter led analysts from Baird Equity Research to suggest that Meta’s shares were entering a “penalty box” phase. Following this, Meta adjusted its revenue projections for April-June to be below expectations and increased its expense forecast for 2024 by $2 billion, also raising its capital expenditure outlook to boost its data center investments, crucial for catching up with AI leaders like OpenAI and Microsoft.
Despite these cautious projections, the company had previously seen a surge in its stock value, nearly tripling in 2023. This was helped by record-breaking earnings and a historic market value increase of $196 billion in February, spurred by its first dividend announcement.
However, some analysts remained optimistic about Meta’s AI investments, citing increased user engagement on platforms like Instagram Reels and positive feedback for its virtual assistant Meta AI and the Llama 3 language model.
Evercore ISI analysts noted, “We think this time it is different,” highlighting a strong advertising demand and enhanced user engagement as reasons for optimism about the ongoing investment cycle.
Despite varying analyst opinions, with 19 lowering and 13 raising their price targets, the median price now stands at $525, roughly 6% above its previous close. Meta’s stock, with a 12-month forward price-to-earnings ratio of 23.12, compares favorably against Microsoft’s 31.17 and Alphabet’s 22.07, having risen nearly 40% this year, outperforming the S&P 500’s 6% increase.
Bernstein analyst Mark Shmulik commented on the investment risks, stating, “Being on the offensive with investment spending is generally great, but in the internet sector, it is very hard to determine which investments will eventually pay off and when.”
This series of developments has left investors pondering the duration of this investment cycle, the reality of its potential returns, and its feasibility amid slowing growth.
