Last week, America’s biggest banks kicked off earnings season for the September-ended quarter. But Wall Street is waiting to hear from the trillion-dollar technology giants that currently lead the artificial intelligence (AI) race, because they tend to deliver much stronger revenue and earnings growth than the rest of the market.
Meta Platforms (NASDAQ: META) is scheduled to report its results for the third quarter on Oct. 30. Besides analyzing the company’s financial performance, investors will be looking for fresh information about its AI strategy.
However, Meta will report one number relating to AI that might be more important than the rest.
Image source: Getty Images.
Meta is integrating AI into all of its products
Meta is home to popular social media platforms Facebook, Instagram, WhatsApp, and Messenger. Facebook and Instagram generate revenue by selling advertising slots to businesses, so the more time each user spends on those apps, the more money Meta makes.
AI has become a powerful tool for boosting engagement. It learns what each user likes to see so Meta can feed them more of it, which in turn keeps them online for a longer period of time. Plus, Meta is giving businesses new AI tools to help them craft more engaging ad content to boost conversions. When businesses see strong results, they are inclined to spend more money.
The company also launched a free virtual assistant earlier this year called Meta AI. It’s capable of answering complex questions, generating images, and it can even join your group chat on WhatsApp and Messenger to settle debates. Meta AI paves the way for new chatbots like Business AI, which will give every merchant an AI agent capable of handling incoming queries from customers, and even processing sales. That could open the door to new revenue streams for Meta.
Meta AI is powered by the company’s own large language model (LLM) called Llama. Building an LLM requires a substantial amount of computing capacity. The company says its latest Llama 3.1 model required 16,000 data center graphics processing chips (GPUs) to develop, which are usually supplied by Nvidia. However, Meta is already working on Llama 4, which will require a whopping 10 times more computing capacity, meaning 160,000 GPUs.
Meta CEO Mark Zuckerberg says Llama 4 could set the benchmark for the entire industry when it launches next year. However, he’s trying to bring 600,000 GPUs online by the end of 2024, which means he’s already thinking about the long-term future of the company’s AI ambitions — but that comes at a substantial cost.
The number Meta investors need to watch
Building data centers and filling them with chips from suppliers like Nvidia isn’t cheap, and spending can quickly climb into the tens of billions of dollars. Each quarter, Meta CFO Susan Li provides investors with a forecast for how much the company plans to allocate to capital expenditures (capex) — most of which now relates to AI infrastructure.
Meta’s capex forecast for 2024 has already increased three times. Li’s initial guidance suggested spending would come in between $30 billion and $35 billion for the year, but that range had climbed to $37 billion to $40 billion by the second quarter. Investors should look out for yet another upward revision.
Meta’s business model is very different to Microsoft‘s or Amazon‘s, for example. Those two companies are also spending tens of billions of dollars on AI data centers, but they rent them out to businesses and developers who use the computing capacity to build AI software. As a result, they generate revenue almost immediately.
As I touched on earlier, Meta is primarily using its data centers to build its Llama LLMs, and since they are open-source, they don’t create an immediate revenue stream. Investors might have to wait until new features arrive on Facebook and Instagram (like Business AI) before the real monetization begins.
That’s a problem, because Meta stock is driven by earnings
Capex is important to monitor because it’s a headwind for Meta’s earnings per share. The more money it spends building data centers during a particular quarter, the less money that flows to its bottom line as profit for the period.
In Meta’s case, its growing profits have been the undisputed driver behind the 534% surge in its stock since it bottomed in October 2022. Just look at the chart below, which overlays the company’s trailing-12-month earnings per share with its stock price:
Ironically, excessive spending on virtual reality and the metaverse caused the steep drop in Meta stock prior to 2022. Investors became frustrated with the lack of financial results for all of its spending, because the company’s Reality Labs division was generating minimal amounts of revenue.
Therefore, anything that threatens to hurt Meta’s earnings could trigger some turbulence in its stock yet again, and the signs of a slowdown are apparent already. Meta’s earnings in both the first and second quarters of 2024 came in below its peak from the final quarter of 2023.
If Meta’s earnings flatten out or start to shrink from here, it could be a sign that the financial payoff from Llama (and AI in general) isn’t big enough to justify the company’s spending at this stage.
On the plus side, Meta stock is heading into its Oct. 30 report at a price-to-earnings (P/E) ratio of 29.4, which is a discount to the 32.1 P/E ratio of the Nasdaq-100 index. That means it’s selling at a relatively reasonable price right now, so investors might be willing to give the company some latitude if its capex forecast continues to climb — at least for now.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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