Is Meta an emperor’s new clothes moment for AI hype?
Is AI spending going to make many shareholders worse off?
In 1837, Hans Christian Andersen’s fable, “The Emperor’s New Clothes” was published.
The story was about a king who was obsessed with his clothes and his image. Along came a couple of swindlers to take advantage of this by telling the king that they were able to make him the finest clothes which couldn't be seen by people who were either not like him or were stupid.
The king liked the sound of this and bought in. The trouble was that he didn’t have any new clothes at all and was walking around stark naked. Because it was the king, most people didn’t point this out to him until a small boy cried out “he has nothing on”.
I find myself thinking that there are similarities between this story and the stock market’s and financial media’s obsession with artificial intelligence (AI).
There is no doubt that artificial intelligence is here and companies are going to spend lots of money on it. This has already been good for the companies that design the high powered micro chips that enable AI applications such as Nvidia and Advanced Micro Devices.
Whether the billions of dollars that are being invested by their customers are going to make their shareholders better off is by no means certain.
History is littered with periods where new technologies appear and excite investors. Initially speculators make huge fortunes betting that it will transform the world and lead to a period of riches. Think of radio, air travel and the internet as examples of this.
The latest hot theme is AI. Yet apart from the likes of Nvidia where investors can see the benefits coming to them, elsewhere things are not going well.
Meta’s founder, Mark Zuckerberg, has literally bet the future of his company on AI and the metaverse and it seems that he is getting further away from having something to show for the money being splurged on it.
This week, Meta upped its forecast of investment spending to as much as $40 billion for 2024 and said that the amount would continue to grow in the years ahead as it ploughs more money into AI research.
This means bigger losses for Meta’s Reality Labs division. The market gave this a big thumbs down which led to Meta’s shares falling by 12%.
When I last wrote about Meta back in November last year, Wall Street analysts were forecasting losses of $19bn for Reality Labs in 2025. Reading around the internet, it seems that those losses could now approach $22bn and perhaps exceed $25bn in 2026.
These are big numbers which are significantly diluting the ongoing strength of Facebook’s advertising business.
Meta’s earnings per share (EPS) would be a lot higher if it wasn't for the big losses from Reality Labs.
But perhaps the losses have more significance.
They could represent a moment when investors wake up, smell the coffee and realise that perhaps they have no idea whether AI is going to make them lots of money and could actually be a huge destruction of shareholder wealth.
Yet, Meta and AI are symptomatic of today’s stock market where investors chase stories and forget or ignore whether any real profits will flow from them.
This has not just been seen with AI but also with the stories about driverless cars and automated grocery pickers.
When Warren Buffett says that the stock market has become more like a casino in recent times, it’s hard to disagree with him.
Once the euphoria wears off and someone shouts that “the emperor has no clothes”, share prices revert to being determined by fundamentals and hard facts.
When these are taken into account, perhaps more investors are coming to the conclusion that many share prices are up with events and making money is going to become more difficult going forward than it has been in the recent past.