By Dan Gallagher
Meta Platforms' big AI moment is overshadowing its " big-tobacco" moment. But this is a tough time to have any sort of cloud over the business that is paying for the social network's attempt to remake itself into an artificial-intelligence superpower.
Meta's announcement of its new Muse Spark model this week comes nearly a year after it delayed the rollout of an advanced version of its last model family known as Llama. It also represents the first release from the Meta Superintelligence Labs that the company rushed to build up last year after Llama misfired.
The Muse Spark launch also comes just two weeks after a pair of stinging court losses. Those essentially found the Facebook and Instagram parent legally responsible for harms done by content posted to its platforms.
Those verdicts could open the floodgate to a wave of new legal challenges to Meta's lucrative business. That sparked frequent comparisons to the big tobacco cases in the 1990s that eventually resulted in changes to business practices and a massive legal settlement.
Meta's stock slumped after those verdicts, but a 9% jump since the Muse Sparks release has helped the shares fully recover from that selloff.
Still, Meta's share price is down about 14% over the past six months, lowering its valuation to 21 times projected earnings, making it one of the cheapest megacap tech stocks.
But any hope for a sharp recovery, should the market get past current uncertainties around the Iran war, could be blunted by the recent court verdicts. There is the distinct risk of a domino effect given the thousands of other pending cases against the company.
Although Meta has considerable means to fight and appeal, the prospect of prolonged legal conflict could act as a brake on the stock for some time.
Muse Spark does appear to be competitive with other so-called frontier AI models. The AI benchmarking firm Artificial Analysis ranks Muse Spark's performance near the latest top offerings from Google, OpenAI and Anthropic, marking a significant jump from the last Llama that sits dead-last on the firm's current rankings.
"Muse Spark clearly establishes Meta as an active and credible participant in the model race standing shoulder-to-shoulder with leading players," Bernstein analyst Mark Shmulik wrote Thursday.
Muse Spark is also only the first in what is expected to be a string of advanced-model releases by the company this year. So any delay would have looked bad considering the eye-watering sums Meta has been spending to pull ahead in the AI race.
The company's capital expenditures jumped 84% to more than $72 billion last year. Meta has projected another big surge this year, potentially hitting as high as $135 billion.
Reported capex doesn't even capture the full scope of Meta's spending on AI. The company embarked on an expensive recruiting binge last year for top AI talent, some of whom drew nine-figure paychecks. Meta's R&D spending jumped 31% last year to $57.4 billion, and it is expected to surge another 42% this year to about $81 billion, according to projections from Visible Alpha.
Meta's core business of online advertising provides a lucrative means of support for its AI ambitions. The company boasts an annual operating margin of 41% -- nearly 10 points higher than what Google-parent Alphabet posted for 2025.
But Meta is also waging a much bigger gamble, given Google's lead in AI and Meta Chief Executive Mark Zuckerberg's stated intentions to reach the milestone of "superintelligence" first. The high end of Meta's capex target for this year would equate to 54% of Meta's projected revenue -- more than double what Google is expected to spend as a percent of its own revenue for this year.
So the AI race is a particularly inopportune time for Meta to face the risk of a big-tobacco moment in the future. The recent verdicts did little damage monetarily. The $6 million in total damages awarded by a jury in Los Angeles in a case involving Meta and Google's YouTube is less than half the operating cash flow that Meta alone generates every hour.
But that case also found the companies were negligent in how they designed their products, making them addictive to young users. That is how the ruling got around the section of the longstanding Communications Decency Act that has generally shielded internet companies from being found liable for content users post on their platforms. Meta has strongly denied that it designs its products to be addictive and plans to appeal the rulings.
In a report last week, Dan Salmon of New Street Research said that the Los Angeles ruling "could be the first of a tidal wave," given that there are two major case dockets involving more than 4,000 private lawsuits pending in California courts. A San Francisco federal judge overseeing some of those cases has scheduled a hearing for April 15.
The big-tobacco settlement in 1998 resulted in tobacco companies agreeing to change the way they market their products and pay states $206 billion over 25 years. A similar amount would be more manageable for Meta. It makes that much in annual revenue now and has far higher operating-profit margins than Philip Morris, the biggest tobacco company, commanded at the time of the settlement.
Still, Philip Morris wasn't spending more than half its revenue on a new product. And the culmination of that product, superintelligence, is still likely years away.
This means Meta's need for robust cash flow won't abate anytime soon. Wall Street expects capital expenditures alone to keep going up, well above the $100 billion mark for at least the next four years, according to estimates from Visible Alpha.
Meta's AI future can't be decoupled from its social-media future.
Write to Dan Gallagher at dan.gallagher@wsj.com
(END) Dow Jones Newswires
April 10, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments