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Alphabet (NASDAQ:GOOG) was a big stock market winner this week after the company’s Q3 earnings report on Wednesday (29 October). But not all is well in Silicon Valley.
By contrast, Meta Platforms (NASDAQ:META) saw its share price go the opposite way. And this tells investors something very important about the outlook for artificial intelligence (AI) stocks.
Still growing, still spending
Alphabet reported revenue growth of 16% in Q3. But the real highlight was its Google Cloud division, where sales came in 34% higher than the previous year.
As a result, the firm increased its capital expenditure forecasts from $85bn to between $91bn and $93bn for the full year. The stock market liked this very much, sending the share price up.
Meta reported sales growth of 26%, driven by continued strength in its advertising business. The company also announced a slight increase in its AI spend going forward.
The stock market didn’t like this at all, sending the stock down 11%. So here we have two companies growing strongly and increasing their AI spend – so what’s the difference?
Demand
At the moment, Alphabet is spending in order to be able to meet current demand from customers. Meta, on the other hand, is not – and that’s the big difference between the two.
Google’s Cloud business involves selling computing power to third parties. And the demand for this is so strong that the firm needs to build out additional data centres to meet this.
Meta, on the other hand, is in a different position. The company’s large-scale AI infrastructure is purely for its own use in building and improving its own products.
That makes its AI investments riskier. And CEO Mark Zuckerberg confirmed that Meta is building more capacity than it currently has use for in anticipation of future needs.
AI bubble?
A lot of investors are wary of an AI bubble at the moment. In that context, the difference between Alphabet and Meta is huge, which explains why the stocks went different ways.
It’s one thing to be building infrastructure where demand is known. But it’s quite another to be putting cash out in the expectation that a use for it will appear at some point in the future.
Meta’s strategy might well turn out to be the right one. But that’s not guaranteed and this kind of spending is the kind of thing investors concerned about a bubble are looking for.
Equally, there is a chance that the demand Google is seeing subsides and its investments don’t work out. Right now, though, its capital expenditures look much less speculative.
Ups and downs
Sometimes the stock market does things that don’t make any sense. Other times, there’s an explanation to be found for investors who are willing to look for it.
Meta is one of the major companies that is making genuine progress with AI. Its AI programmes have generated real improvements to its social media platforms.
Despite this, its spending looks much riskier than Alphabet’s. I think investors can justifiably consider buying either stock, but the difference between them in terms of AI is huge.
