Analysis-Meta's AI splurge lays bare its compute conundrum

By Aditya Soni and Sayantani Ghosh

July 30 (Reuters) - Meta can simultaneously fuel its own AI ambitions and rent out its scarce computing capacity to bolster returns, CEO Mark Zuckerberg signaled on Wednesday. The problem is: investors aren't buying it.

The Instagram owner is splurging billions to build compute - chips, servers, energy and data centers 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% from a year ago, ‌drove its stock down more than 9% 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.

Microsoft on Wednesday showed how its AI bets ⁠were paying off even as its free cash flow fell 23%. The Windows maker breezed past expectations for growth in its Azure cloud unit and Copilot assistant thanks to a huge base of corporate customers and its early AI build-out, sending its stock up over 13%.

SPENDING LIKE A CLOUD GIANT

"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 mass-market 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 massive AI spending.

Responding to a question from ‌J.P.Morgan analyst Doug Anmuth, who noted that Meta was also purchasing capacity from third parties while selling compute, Zuckerberg said Meta was intentionally investing ahead of demand.