Does Meta sell AI better than Google and Microsoft?

On 1st August, in response to their earnings call for Q2 2024 , Meta Platforms’ stock opened 9.72% higher than its previous close. Facebook’s parent company experienced an impressive 73% increase in net income and a 58% increase in income from operations, comfortably beating analyst expectations.?

It was somewhat peculiar that the stock price increased despite the company insisting on significant capital expenditures to support artificial intelligence (AI) research and product development.

Let’s decipher this riddle!

Market Reactions to Google and Microsoft

Just like Meta Platforms, Alphabet (Google’s parent company) and Microsoft highlighted the need to spend on developing AI products in their earnings calls for Q2 2024. However, as of 9th September, since their earnings call, Alphabet is 18.44% down, and Microsoft is 3.89% down.?

Both Alphabet and Microsoft posted earnings results that were better than analyst expectations. Alphabet’s total revenue grew 14% while Microsoft’s total revenue grew 15%. Both companies reported a 29% increase in revenue from their cloud services business.?

Since all three companies beat analyst expectations, the only difference between Meta Platforms, Alphabet, and Microsoft could be the discussions that unfolded in the earnings calls.

How did Zuckerberg sell his investors on AI?

In the Q2 2024 earnings calls, all three companies mentioned that they will go big on AI-related capital expenditure.

In his opening statement, Zuckerberg noted how AI advancements were improving the quality of recommendations and driving engagements. By doing so, Zuckerberg established the significance of AI in improving advertising revenue.

Meta Platforms’ AI applications were consumer-facing and thus, could have an immense impact in the short term. They directly affect user experience and improve engagement period.

Zuckerberg also talked about how AI Studio can let anyone create AIs to interact across Meta Platforms’ apps. These custom AIs help creators create content and engage in conversations with thousands of followers more efficiently. This is a very useful capability for brands who want to build a community via social media.

The Meta Platforms’ CEO also mentioned how business messaging revenue could improve significantly through the business AI product currently in development.

A common theme here was that all of Facebook’s AI initiatives were directly improving engagement and thus, driving advertising revenue. The cherry on top was the fact that Llama 3.1, the model behind Meta Platforms’ AI initiatives, was offering better cost performance than leading closed models.

Where did Alphabet and Microsoft go wrong??

Alphabet’s CEO, Pichai, argued that the risk of underinvesting in AI was much greater than overinvesting. He added that even if they overinvested, the infrastructure investments would still be useful in the long run.

On the other hand, Microsoft’s CFO, Hood, mentioned that one of the reasons why Microsoft was able to improve margins despite heavy investments into AI was because the investments were made in consistency across their tech stack. Microsoft had a leverage opportunity because its AI boost came without adding a material number of people to the workforce.

So, at Alphabet and Microsoft, the AI investments were focused on building infrastructure, the returns on which were difficult to quantify for the market. Microsoft made a better argument than Alphabet but the narratives presented by both companies fell short of Meta Platforms.

Even though all three companies had similar themes for capital expenditure, investors showed more confidence in Meta Platforms because of how direct the benefits were.

Eqvista—Empowering Investors Through Precise Valuation Insights!

Meta Platforms outperforming Alphabet and Microsoft after their respective earnings calls is a sign that investors are no longer blindly putting their money behind anything with an AI tag. Investors are now looking for concrete answers to how businesses can leverage AI. After witnessing this, we can safely assume that the investor frenzy around AI has sobered up.

We saw how Meta Platforms’ AI capital expenditure was better received than its counterparts because it demonstrated the short-term impact and long-term potential of AI in driving its main business.

If you are an investor looking to cut through the clutter, consider getting Eqvista’s detailed and data-backed valuation reports to supercharge your investment decision-making process. Contact us to know more!