Meta Platforms, Inc. (ASX: META) shares surged 9% on Wednesday, marking a strong start to the new quarter after a prolonged period of stock price weakness.
Wall Street views the company's strategic move into cloud computing favorably, as CEO Mark Zuckerberg aims to convert its massive investments in artificial intelligence into a new revenue stream.
However, compared to its highly profitable core advertising business, the cloud venture is likely to exert downward pressure on the company's overall profit margins, requiring investors to adjust their expectations accordingly.
Strategic Shift and Market Reaction
Mark Zuckerberg is betting on a promising new market, but one with significantly lower profitability than the online advertising sector where Meta is a dominant leader.
While giants like Amazon, Microsoft, and Alphabet have reaped substantial rewards from their cloud infrastructure businesses, Zuckerberg has recently signaled Meta's potential entry into this arena. Financial commentator Jim Cramer confirmed on Wednesday that Meta plans to sell its excess computing capacity to external clients. The company is considering two main options: opening access to its AI models deployed on its infrastructure or directly selling raw computing power.
The capital market responded enthusiastically to this news. Following a year of declines, Meta's stock jumped 9% on Wednesday, its largest single-day gain in over five months. Investors have long anticipated Meta diversifying its business and monetizing its multi-billion dollar investment in high-end data centers and AI infrastructure.
Karan Ramchandani, Managing Director at consulting firm Oak Group, stated, "Developing computing services as a new revenue growth driver was always part of the company's roadmap. Entering the cloud market and selling computing power to enterprise clients is a logical step."
Management's Vision and Financial Context
At Meta's annual shareholder meeting in May, Zuckerberg explicitly stated that expanding into cloud services was "absolutely something we're considering." Seven months earlier, during an earnings call, he revealed that numerous companies had approached Meta, offering premiums above its internal costs to purchase its spare computing capacity.
Prior to this recent rally, Meta's stock had declined for four consecutive quarters, erasing nearly a quarter of its market value. In April, the company raised its 2026 capital expenditure guidance ceiling by $10 billion to $145 billion, partly funded by debt issuance. Meta raised $25 billion through a bond offering when it released its first-quarter results.
Paul Meeks, Head of Tech Research at Free Capital Markets, analyzed the cloud move: "The market has been questioning the company's over-investment and doubting the return on that massive capital expenditure. Moving into cloud computing is Meta's response to that. But this company has only built computing infrastructure for its own use so far and hasn't yet achieved large-scale commercial monetization of various AI applications."
To date, the returns from Meta's AI investments have almost entirely manifested in its core advertising business: significantly improved ad targeting and more creative tools for marketers. Currently, 98% of Meta's revenue still comes from online advertising.
Zuckerberg is working to change the market's perception of the company, with the cloud push being one of his most ambitious new initiatives. In May, Meta announced paid subscription tiers for Instagram, Facebook, and WhatsApp, along with two Meta AI app subscription services, which boosted the stock nearly 4% on the news.
Meta declined to comment on this report.
Cloud Market Dynamics and Competitive Landscape
As the generative AI boom approaches its fourth year, cloud infrastructure has become a scarce and critical resource, with few companies possessing the capacity for large-scale service delivery. The U.S. cloud market is dominated by Amazon AWS, Microsoft Azure, and Alphabet's Google Cloud, which have built vast commercial empires on corporate demand for outsourced computing.
Evercore analyst Mark Mahany believes Meta will not directly challenge the three major cloud providers head-on. Instead, it will likely follow the path of new specialized cloud service providers like CoreWeave and Nebius, focusing on leasing AI-specific computing resources, such as those powered by NVIDIA chips.
Shares of CoreWeave and Nebius both fell more than 10% on Wednesday following the news of Meta's potential entry.
Mahany noted that Elon Musk's SpaceX, which houses xAI, has somewhat catalyzed Meta's cloud ambitions. SpaceX has recently signed several deals to lease out its computing capacity, reportedly generating over $2 billion in monthly revenue from clients like Alphabet, Anthropic, and AI startup Reflection AI.
Brian Schechter, a partner at primary venture capital firm Primary Venture Partners, also drew a parallel between Meta and SpaceX: both companies have invested tens of billions of dollars to build their own infrastructure for training large AI models.
Schechter said, "Neither company has launched a breakout AI application that captured the market. Monetizing excess capacity also underscores that computing power is gradually becoming a standardized commodity."
Profitability Concerns and Historical Precedents
Many investors worry that a cloud business could weigh on Meta's overall profitability. Building a cloud service requires large enterprise sales and technical support teams, and the industry's profit margins are far lower than those of advertising.
Meta currently boasts an industry-leading gross margin of 82% and an operating profit margin of 41% in its latest quarter. Alphabet's history provides a reference: its advertising business had a 42% operating margin in the first quarter, while its cloud business margin was only 18%. Furthermore, Google Cloud took years to become profitable. Alphabet launched its cloud infrastructure in 2008, commercialized it in 2011, began reporting its cloud financials separately in 2020, and only first turned a profit in the first quarter of 2023.
Meeks commented that Meta possesses one of the best business models in technology, but any new venture outside of advertising will dilute overall earnings and reduce its once-stellar margins.
"As a Meta shareholder, I would prefer the company to stick to its open-source model strategy and monetize AI through high-margin software and hardware products, rather than building massive new data centers in places like North Dakota and getting dragged into a brutal cloud pricing war," Meeks said.
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