Meta Lags Rival Hyperscalers as Investors Grow Wary of Surging CapEx

Meta is putting its metaverse pivot behind it in every way except a rename, but even as it rakes in AI-related revenue, investors seem concerned about its gargantuan bet on the tech. 

The Instagram parent said Wednesday that revenues surged an expectation-beating 33% from more than $42 billion a year ago. But even then, concerns are rising that Meta, which trades at a huge discount relative to its Mag 7 peers, is stretching those funds too far. Investors sold Meta’s stock after the bell. 

Meta spent massively on AI-powering data centers as its capital expenditures rose to nearly $20 billion for the first quarter. While that was less than analysts predicted, Meta’s planning a spending spree later this year, raising its forecast for capital projects to a range of $125 billion to $145 billion, up from a previous projection of $115 billion to $135 billion.  

Mag 7’s Biggest Sale

Other hyperscalers (Amazon, Alphabet and Microsoft) also reported yesterday, sharing results that underscored how much of a bargain Meta is. Its 33% revenue gain in the first quarter outpaced those of its hyperscaling peers: Amazon’s 17%, Alphabet’s 22% and Microsoft’s 18%. 

But analysts have put Meta’s forward price-to-earnings ratio at 18, below those of Zuck’s hyperscaling frenemies, most of which have forward P/Es over 20. That could indicate it’s a steal or that it could soon board the struggle bus:

• Meta’s rising AI capital expenditures are making investors nervous. After its failed metaverse pivot and mounting losses from the Reality Labs division that made the infamously legless avatars (plus a recent staff culling there), Meta’s under more pressure to pull off its AI shift. Meta’s also more dependent on its ads (which account for about 98% of its total revenue) than peers like Alphabet, which has diversified its businesses up to the cloud, a segment whose revenue climbed more than 60% in the most recent quarter, and down to street level with Waymos.
• On the other hand, the Facebook parent has shown so far that its ad business can not only survive the era of AI but also leverage it to grow with more advanced targeting and other features. Alphabet’s ad biz has also taken advantage of AI, with ad revenue rising 15% last quarter from the previous year. 

The Non-Dollar Cost: Hyperscalers can’t keep spending without finding cost-savings somewhere. And that means trading human intelligence for artificial intelligence. In January, Meta laid off about 1,000 people and added hundreds more to the layoff list in March. Last week, the company said that starting in late May, it’ll lay off 10% of its staff, or 8,000 employees, and stop hiring for 6,000 open roles. Amazon and Microsoft have similarly made plans for massive cullings.