Meta's AI splurge lays bare its compute conundrum, cash flow shrinks by 91%

Meta can simultaneously fuel its own artificial intelligence (AI) ambitions and rent out its scarce computing capacity to bolster returns, Chief Executive Officer (CEO) Mark  Zuckerberg signalled on Wednesday. The problem is: investors aren't buying it. The Instagram owner is splurging billions to build compute — chips, servers, energy and data centres that power AI — leaving it with free cash flow of just $784 million in the second quarter to run and grow its business. That collapse, of 91 per cent from a year ago, drove its stock down 9 per cent pre-market on Thursday.

 

Pressed by analysts for details on Meta’s plans, Zuckerberg framed compute as a scarce strategic asset that the company should keep and build around, rather than simply sell for short-term profit. But he acknowledged that the company had received a number of offers for its computing capacity from businesses that wanted to deploy their own AI plans “at a meaningful premium” over what it invested to build that capacity.

 

 

That tension sits at the heart of Meta’s challenge in diversifying its revenue stream. Renting out compute could ease Meta’s cash-flow squeeze, but would also divert scarce resources from its own push to build AI models and services. Having built its fortune selling ads on Facebook and Instagram, the company is now trying to take on larger rivals including Microsoft, Alphabet and Amazon that have deep ties to enterprises, an early and lucrative market for AI.

 

“We believe that there will continue to be a significantly higher margin on selling intelligence rather than selling compute directly, but we think that there’s a big opportunity obviously to sell compute as well,” he said, as he painted a picture of what Meta hopes to build with its AI spending spree. Zuckerberg argued that AI-powered personal assistants could become a massmarket product used by billions of consumers, while business agents could eventually help companies handle customer service, sales and marketing. But beyond broad references to subscriptions and enterprise services, he offered few specifics on how those businesses would justify Meta’s AI spending.

 

Meta’s massive AI spending push has unnerved some investors, who are drawing parallels to its costly pivot to the metaverse — a bet that racked up tens of billions of dollars in losses without becoming a large revenue generator. Its free cash flow slump in the April-June quarter was the steepest since late 2022, when the metaverse bet attracted investor scrutiny. Still, Meta raised the low end of its capital spending forecast by $5 billion, lifting the range to between $130 billion and $145 billion.