The AI trade is coming to a realization: America\u2019s best businesses are turning into utilities.<\/p>\n
Such is the fate that befalls Meta, whose shares fell as much as 10% in after-hours trading Wednesday after the company missed earnings due to costs ballooning 55% (Meta\u2019s stock later recovered some ground and was down 7%). Its operating income fell 8%, net income dropped 14%, and it barely eked out just $784 million of free cash flow\u2014just narrowly missing falling into negative territory and well below the roughly $12 billion in free cash flow the company has averaged over the previous eight quarters. <\/p>\n
\n
Meta\u2019s revenue in Q2 was up 28% from a year earlier, beating expectations, but operating income at Family of Apps, the segment containing Facebook, Instagram, WhatsApp and Messenger, fell to $23.4 billion from $25.0 billion.<\/p>\n
So, its core business grew revenue, but made less money doing it.<\/p>\n
And the money that the company is earning is immediately being used\u2014and most of it is not going to investors. The reason why is the term investors have come to love-to-hate: Capex. Capital expenditure now is up to $31.1 billion in the quarter, nearly double the amount spent the year earlier. Operating cash flow came to $31.9 billion; in other words, the company spent almost every dollar of cash its businesses could generate on AI infrastructure: servers, data centers, network infrastructure and chips.\u00a0<\/p>\n
Meta has always had to invest in the data centers that serve its popular social networking services to people all over the world. But the massive amount of computing power necessary to train and run AI models has supercharged the level of investment, upending the financial model in which Meta\u2019s lucrative advertising business allowed it to stockpile cash.\u00a0 This new Meta, like its hyperscaler peers,\u00a0 must build multi-billion-dollar data centers at a non-stop pace, acquiring land, securing power, purchasing chips, running cooling systems and replacing machines that become obsolete within years (Depreciation and amortization in the second quarter rose 46% year over year to $6.4 billion in the quarter).\u00a0<\/p>\n
Its other rivals, Microsoft, Amazon and Google, have created an escape hatch for themselves, renting that infrastructure to outside customers through enormous cloud businesses.\u00a0That allows them to generate immediate revenue from their cloud investments. Indeed, Microsoft was enjoying its stock rising almost 2% from that cloud growth after Wednesday\u2019s close of market as Meta CEO Mark Zuckerberg fielded questions from analysts wondering why his company wouldn\u2019t do the same.<\/p>\n
Zuckerberg acknowledged the potential to generate additional revenue by renting its computing infrastructure to other companies, and confirmed that Meta has plans to get into the cloud business, promising an update soon. \u201cWe\u2019re getting a lot of offers for compute at a significant premium for what we paid for it,\u201d Zuckerberg said.<\/p>\n
But he framed the opportunity as more of a side quest than a core business, and said that he believed the real value is in offering its own AI services on top of its infrastructure. \u201cIt would be foolish to basically just sell all of the compute and take a short-term profit,\u201d Zuckerberg said. He added the company expects \u201ca significantly higher margin on selling intelligence rather than selling compute directly.\u201d<\/p>\n
The intelligence Zuckerberg meant was a full-stack of businesses Meta hopes to build: an ad system that AI has made 15.7% better at converting, agents that could answer customer messages for a million businesses, an API selling access to Meta\u2019s models, and, most mysteriously, a personal assistant working 24\/7 to build a profile of a user\u2019s health, finances, and relationships, which does not exist yet. \u201cThere\u2019s only so much that I can say on an earnings call about this,\u201d Zuckerberg said.<\/p>\n
In the meantime, the company has transitioned its financing. Meta issued $24.9 billion of long-term debt during the quarter and bought back no stock, after repurchasing more than $10 billion a year earlier. CFO Susan Li said Meta had been deliberately moving toward \u201ca greater mix of debt\u201d to fund infrastructure projects with long lives and expected passive income.<\/p>\n
Meta now expects full-year capital expenditures of $130 to $145 billion, having raised the floor. It spent $50.9 billion in the first half. That leaves $39 billion to $47 billion a quarter for the rest of the year, against operating cash flow of roughly $32 billion. So, it follows that this quarter was the last positive cash-flow quarter this year.<\/p>\n
But asked what 2027 would cost, Lee declined to say, offering instead that Meta expects to remain demand-constrained; that it has more profitable uses for computing power than computing power to use. Zuckerberg, not one to balk to investors, did not choose to hedge this time either.<\/p>\n
\u201cMy personal bet is that the people who invest in this are going to be rewarded and feel very good over time,\u201d he said.<\/p>\n<\/div>\n
#Meta #stock #drops #free #cash #flow #crushedand #Zuckerberg #hints #cloud #business<\/p>\n","protected":false},"excerpt":{"rendered":"
The AI trade is coming to a re… <\/p>\n","protected":false},"author":1,"featured_media":1160,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[754,269,161,869,2176,1730,755,1644,756,228,636,2177,850,480,91,851],"class_list":["post-1159","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance-news","tag-amazon","tag-business","tag-cash","tag-cloud","tag-crushedand","tag-drops","tag-earnings","tag-flow","tag-fortune-500-companies","tag-free","tag-google","tag-hints","tag-meta","tag-openai","tag-stock","tag-zuckerberg"],"yoast_head":"\n
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<\/p>\n