Meta’s AI Bet Pays Off Now, with Future Potential Still Looming
Mark Zuckerberg, CEO of Meta Platforms Inc., is urging investors to look at the present as Meta’s substantial AI investments are already paying dividends. Following a better-than-expected second-quarter earnings report, Zuckerberg and Meta’s CFO Susan Li highlighted the significant impact AI is having on the company’s core business: digital advertising. Meta’s revenue grew by 22% year-over-year, exceeding the growth rates of Google’s ad business (11%), Pinterest (21%), and Spotify (20%). This success is directly tied to AI-powered improvements in recommendations and ad targeting, leading to a more engaging and effective user experience.
Key Takeaways
- AI is Driving Growth Now: Meta’s AI investments, particularly in "core AI," are already improving their advertising platform and recommendation system, resulting in increased user engagement and higher ad performance. This is translating into substantial revenue gains for Meta.
- Growth Outpacing Peers: Meta’s revenue growth rates are significantly exceeding those of its peers in the digital advertising space.
- Generative AI is a Long-Term Bet: While Meta doesn’t expect their generative AI products to contribute meaningfully to revenue in 2024, they see them as a valuable investment with the potential to unlock significant revenue opportunities down the road.
- Capital Expenditures Rising: Meta expects to significantly increase capital expenditures in 2025, focused on supporting AI research and product development efforts.
AI-Powered Ad Platform Revitalization
Meta’s ad platform has seen a resurgence in recent years, thanks in part to the overhaul of their technology stack and user interface. This revamp has been driven by AI, leading to a more engaging user experience and a bounce back in advertising revenue.
Before Apple’s iOS privacy update in 2021, which hindered targeted advertising across the internet, Meta’s ad platform struggled. However, the company has successfully adapted to this change by leveraging AI to enhance user targeting and engagement. The results are evident in their impressive revenue growth, particularly in the Asia-Pacific region, which has shown the strongest ad growth for Meta.
The Future of AI at Meta
While "core AI" is driving current success, Meta is also heavily investing in generative AI, albeit with a longer-term perspective. They believe this technology will create new revenue opportunities in the years to come. Despite the massive investments in generative AI, including billions spent on advanced GPUs from Nvidia, Meta is emphasizing the immediate positive impact of AI on their advertising business, demonstrating that their AI bet is paying off now.
A Two-Pronged AI Strategy
Meta’s sophisticated AI strategy can be viewed as a two-pronged approach:
- "Core AI": This encompasses the current AI technologies driving improvements in the advertising platform and recommendation system, leading to increased user engagement and revenue growth.
- Generative AI: This represents a longer-term investment with the potential to unlock new revenue streams. While expected to contribute minimally in 2024, Meta believes generative AI will be a significant source of revenue in the future.
Continued Investments in AI and the Metaverse
Despite the successes driven by AI, Meta remains committed to their long-term vision of the metaverse. This commitment is reflected in their continued investment in Reality Labs, which continues to incur heavy losses. While the metaverse is still in its early stages, Meta sees its development as crucial for the future of their business.
Investor Confidence
Analysts are taking notice of Meta’s impressive turnaround and the significant impact of their AI investments. Mark Mahaney, internet analyst at Evercore ISI, believes that Meta has already seen a return on their AI investments over the past two years. He suggests investors consider buying Meta shares, citing the company’s strong performance and positive outlook. Angelo Zino, an analyst at CFRA Research, echoes this sentiment, praising Meta for effectively integrating AI across their ecosystem and outpacing their competitors in terms of growth.
A Focus on the Present, with an Eye on the Future
Meta’s recent success demonstrates that their AI investments aren’t purely about future potential; they are already driving significant growth and improvements to their core business. However, their commitment to developing generative AI and the metaverse shows that they are also looking toward a future where these technologies will reshape their business and the entire digital landscape. By balancing their focus between the present and the future, Meta appears poised for continued success in the ever-changing world of technology.
