As you says we don't what their returns will be on the current AI spend. Historical ROIC doesn't tell us much and as you say they've incinerated money before. So what's the argument for their AI spend resulting in high returns? I don't see any.
Imo it's more useful to consider what they are investing in and how that's supposed to generate more revenue/profit. And then also consider how much profit they need to make for this amount of CapEx to be worth it. That's gonna be a pretty big number..
1. Their more capital intensive AI spend started at least back in 2022 and the ROIC since then has been excellent.
2. This may strike you as more of an accounting distinction, but the Reality Labs losses were R&D that were expensed in the period they're incurred. Their returns on actual capital invested in the business (e.g., servers, video cards, data centers, etc.) have been excellent and continue to be even on the incremental capital.
3. It's definitely a big number and I guess that's where some of the bull / bear debate occurs, but despite best-in-class ARPU and taking the #1 spot in advertising globally, I think META CPMs have a lot of room to expand (apparently $10-15 on average globally, and $10-45 in the US) and I think people may end up spending even more time interacting with META properties if AI keeps improving content and AI makes consumers wealthier and have more leisure time. META has a virtual monopoly on recommending new products I might actually like / helping D2C startups break through.
People always think that these giant businesses can't get bigger, but I see a ton of opportunity. The other point is that META had 67% of the earnings but only 32% of the market cap as Google. We could finetune the analysis, but I'd bet META grows faster over the next 5-10 years and it starts a lot cheaper (I'm still index weight GOOGL at the moment)!
Thanks! Those are fair points. One thing is though is that ROIC still doesn't tell you exactly what spend was responsible for what return and obviously there's been a huge step change in terms of spending.
But it's also not really my wheelhouse, just thought the ROIC analysis was a bit too narrow. Will be interesting to follow!
Yes, I agree that ROIC has to aggregate invested capital and the greatest project-level detail we get is either the PPE breakout or looking at incremental invested capital. We'll see if META can maintain a 40%+ ROIC, but I'd be thrilled with even a 20%+ ROIIC as I think that creates a lot of value for owners over time.
For now the incremental ROIC still looks excellent.
As you says we don't what their returns will be on the current AI spend. Historical ROIC doesn't tell us much and as you say they've incinerated money before. So what's the argument for their AI spend resulting in high returns? I don't see any.
Imo it's more useful to consider what they are investing in and how that's supposed to generate more revenue/profit. And then also consider how much profit they need to make for this amount of CapEx to be worth it. That's gonna be a pretty big number..
Thanks for the comment!
1. Their more capital intensive AI spend started at least back in 2022 and the ROIC since then has been excellent.
2. This may strike you as more of an accounting distinction, but the Reality Labs losses were R&D that were expensed in the period they're incurred. Their returns on actual capital invested in the business (e.g., servers, video cards, data centers, etc.) have been excellent and continue to be even on the incremental capital.
3. It's definitely a big number and I guess that's where some of the bull / bear debate occurs, but despite best-in-class ARPU and taking the #1 spot in advertising globally, I think META CPMs have a lot of room to expand (apparently $10-15 on average globally, and $10-45 in the US) and I think people may end up spending even more time interacting with META properties if AI keeps improving content and AI makes consumers wealthier and have more leisure time. META has a virtual monopoly on recommending new products I might actually like / helping D2C startups break through.
People always think that these giant businesses can't get bigger, but I see a ton of opportunity. The other point is that META had 67% of the earnings but only 32% of the market cap as Google. We could finetune the analysis, but I'd bet META grows faster over the next 5-10 years and it starts a lot cheaper (I'm still index weight GOOGL at the moment)!
Thanks! Those are fair points. One thing is though is that ROIC still doesn't tell you exactly what spend was responsible for what return and obviously there's been a huge step change in terms of spending.
But it's also not really my wheelhouse, just thought the ROIC analysis was a bit too narrow. Will be interesting to follow!
Yes, I agree that ROIC has to aggregate invested capital and the greatest project-level detail we get is either the PPE breakout or looking at incremental invested capital. We'll see if META can maintain a 40%+ ROIC, but I'd be thrilled with even a 20%+ ROIIC as I think that creates a lot of value for owners over time.
For now the incremental ROIC still looks excellent.