Meta and Microsoft Show AI Spending Can Be a Double-Edged Sword

28 Januari 2025

(Bloomberg) — On a day US tech stocks lost nearly $1 trillion on concerns about artificial intelligence spending, Meta Platforms Inc. hit a record high — signaling that investors were keeping the faith when it came to its own AI plans.

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The Facebook parent saw its stock undeterred by the perceived challenge posed by Chinese startup DeepSeek — whose AI model is open sourced, like Meta’s Llama. Meta’s recent strength stands in contrast to Microsoft Corp., which has seen its shares falter on concerns about heavy AI spending — including its stake in OpenAI, a key competitor to DeepSeek.

Both companies report on Wednesday, and the return they’re getting from AI will be a key theme.

“Meta is in a better long-term position with AI than Microsoft, and the success of DeepSeek validates its open-source strategy,” said Gene Munster, co-founder and managing partner at Deepwater Asset Management. Llama could become “the DeepSeek of the West” as U.S. companies are unlikely to build off a China-based model, he added.

According to Munster, investors have welcomed Meta’s spend because of the potential for AI to improve its engagement and advertising. In comparison “Microsoft’s AI road has become less clear over the past several months, and the impact will be a lot less immediate,” he said.

The top performer among the Magnificent Seven this month, Meta shares are up 14% in 2025, building on last year’s rally of more than 65%. Microsoft has risen 2.8% this year, and only rose 12% over 2024. Shares of Meta rose 1.8% on Tuesday, while Microsoft fell 0.2%.

Both have stressed a commitment to spending. Meta on Friday said it plans to invest as much as $65 billion on AI projects in 2025, more than expected. Microsoft plans to spend $80 billion this fiscal year.

Microsoft’s past two reports disappointed, and its spending has come under scrutiny, especially amid signs its AI services are only gaining limited traction. In contrast, Meta last quarter said AI was having “a positive impact on nearly all aspects of our work,” contributing to the view its spending boost is a sign of faith in its own strategy.

“The market seems to be embracing this because it thinks Meta is spending more because it sees a good return,” said David Katz, chief investment officer at Matrix Asset Advisors. “The offset to this spending is the impact to profitability, and that’s not as clear right now.” Still, “the market is giving Meta the benefit of the doubt,” he added.

Meta’s spending has long been a focus for investors, in ways both good in bad. The stock sold off by a record 64% in 2022 as CEO Mark Zuckerberg failed to justify funneling billions of dollars into building out the metaverse, an immersive virtual world that failed to catch on with users. However, subsequent cost cutting as part of a “year of efficiency” reignited the stock’s upward trajectory, and Wall Street is largely on board with its AI spending.

While Meta’s bigger rally over the past several quarters could indicate a higher bar to clear with this week’s report, the downside risk could be somewhat mitigated by its relatively cheap valuation.

Microsoft trades at more than 30 times estimated earnings, above its long-term average, and a premium to the Nasdaq 100 Index, which has a multiple of about 26. Meta, at 24.6 times forward earnings, is only slightly over its 10-year average, and it is the cheapest megacap stock outside Alphabet Inc.

“Meta screens as stronger on both momentum and fundamentals, but the way a lot of these AI stocks were priced, something like DeepSeek clearly wasn’t in the gameplan,” said George Cipolloni, a portfolio manager at Penn Mutual Asset Management.

Monday’s selloff “could be an over-reaction, but AI spending is key, and DeepSeek could mean a complete change in how we view the efficiency of that spending,” he added. “There’s almost a palpable feeling of the wind being taken out of the AI trade.”

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Nvidia Corp. shares plummeted 17% on Monday, a drop that erased more than $590 billion from the company’s market capitalization, the single-largest one-day erasure of value in market history by a wide margin. The selloff — the biggest one-day percentage drop for the stock since March 2020 — came amid fears about the implications of DeepSeek, although the chipmaker sought to downplay those concerns. Nvidia is down 11% this year.