Has Meta's Cost-Cutting Gone Far Enough?

Meta Platforms (NASDAQ: META) is cutting back on its capital expenditures, but it’s still outspending its big tech peers. The parent of Facebook and other social media sites doubled its capex from 2020 to 2022, reaching $32 billion last year.

That topped both Microsoft at $24.8 billion and Alphabet at $31.5 billion. And even after focusing on cutting costs during its “Year of Efficiency,” Meta’s capital expenditures are still outpacing those of Microsoft and Alphabet.

Meta expects to reduce capex to between $27 billion and $30 billion this year. But has it gone far enough?

What is Meta spending so much money on?

Meta has consistently increased its capital expenditures during its life as a public company, but spending took a massive step up in 2022. The big focus for the company is artificial intelligence. Both Alphabet and Microsoft have also called out AI infrastructure as the biggest driver of their capital expenditures over the last year and going forward.

AI and machine learning algorithms underpin some of Meta’s biggest efforts in its family of apps business, which drives practically all of the company’s revenue today. Meta’s AI determines the next post you see in your Feed, Stories, or Reels. It decides whether to show you an ad next, and which ad to show you. It helps marketers create and optimize their ad campaigns across Meta’s apps.

The value of AI to Meta is arguably higher than it is for Microsoft or Alphabet. That’s despite the latter two garnering all the headlines about their investments in generative AI. That’s not to say AI doesn’t have huge potential for those bigger companies. But there’s a clear immediate impact on Meta’s business.

Importantly, Meta is willing to spend on AI in order to support its products. That creates some level of uncertainty around capital expenditures going forward. “Since we don’t know how quickly our new AI products will grow, we may not have a clear handle on this until later in the year,” CEO Mark Zuckerberg said on the second-quarter earnings call in July.

For investors, that means higher-than-expected capital expenditures could indicate strong use of its AI tools and products. All things considered, that’s a great outcome, even if costs rise in the near term.

Has the cost-cutting gone far enough?

Meta expects the decline in capex it achieved in 2023 to be a short-term lull in spending. 2024 will see an increase in capital expenditures and operating expenses (as a result of greater depreciation). In other words, Meta thinks it’s now right-sized its operations and capital investments, and will push toward more growth in 2024.

To that end, the outlook for 2024 is strong. Analysts are expecting revenue to accelerate to 12.4% growth — and with good reason. For one, the drag created by Reels over the last couple of years will turn into a tailwind. Management expects the format to become revenue neutral relative to Feed and Stories by the end of the year. And as Reels and other algorithmically surfaced content drive higher engagement, it’ll produce a positive impact on revenue.

On top of that, advertising spend continues to recover. As marketers spend more on advertising, Meta is poised to benefit. The company stands to win an outsize portion of ad budgets thanks in part to its superior AI, which can optimize ad spend better than competitors can.

Investors worried about whether Meta is spending too much should consider if those investments are producing meaningful improvements in the company’s operations. The impact of that massive increase in spending last year has been muddied by macroeconomic factors and other forces outside of Meta’s control. But the long-term impact appears to be a huge positive for Meta, especially relative to other social media companies.

While some may balk at the fact that Meta is outspending practically everyone in tech, I view it as a sign of strength and a huge long-term competitive advantage. That’s why I’m happy to continue holding shares even after the huge run-up in price this year.

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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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.

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