Facebook founder and Meta Platforms CEO Mark Zuckerberg claims that Meta Superintelligence Labs has the strongest research team in the AI industry. It certainly has the spiciest name. With all the focus on AI, it’s almost too easy to forget that Zuck’s enormous ambitions are fuelled by the Family of Apps business that has more than 3.5-billion daily active users. Love him or hate him, that’s a serious business.

And unlike the software names being butchered in the market at the moment, Meta’s consumer value proposition cannot be easily replaced by AI. If anything, AI is helping to drive engagement on these platforms with a combination of improved recommendation engines and creator-focused enhancements.

But investors aren’t getting their hands on all the cash flow from the Family of Apps business. Meta’s ballooning capex bill is just one of many examples in the industry right now, with a land grab strategy under way to carve out a sustainable advantage in the AI era. Instead of talking about app enhancements, we have Zuck talking about custom silicon being developed with the likes of Broadcom and AMD. Don’t forget that they are playing in the hardware space as well, with important partnerships in place with Ray-Ban and Oakley.

At least Meta’s CFO had something to say about Family of Apps, with ad revenue up a casual 29% on a constant currency basis. This was powered by a 19% increase in ad impressions, with the rest coming from price-per-ad increases. If Meta does a better job of serving the right ads to the right users, it can charge advertisers more per ad.

Mark Zuckerberg’s personal Facebook account is displayed on a mobile phone with the Meta logo visible on a tablet screen. (NurPhoto)

This trajectory stands in stark contrast to Reality Labs at Meta, where revenue fell 2% year on year due to pressure on Quest headset sales. The headsets seem to be firmly in the “too hard” bucket, particularly when you compare them with the relatively strong consumer adoption of AI glasses.

In fact, the “other” revenue line in Family of Apps was more than double the revenue of Reality Labs. This includes subscriptions revenue and paid WhatsApp messaging, with these helpful growth engines boosting this line 74%. Despite all the excitement around AI hardware, a “free” messaging app is generating more revenue!

None of this is stopping Zuck (or other execs in the sector) from throwing more money at the AI problem. The war for AI talent is one of the drivers of increased employee costs, with total group expenses up a substantial 35% year on year. Though headcount was actually down 1% quarter on quarter, the mix changed as resources were prioritised towards infrastructure-focused roles.

Despite all the excitement around AI hardware, a ‘free’ messaging app is generating more revenue!

The important nuance is that Meta doesn’t justify its AI spend based on revenue in Reality Labs. Instead, it constantly reminds the market that AI permeates the entire business, driving other critical metrics such as reel time on Instagram and total video time on Facebook. The recommendation systems that drive the algorithm sit at the core of the user experience. A happy user is a scrolling user — and thus a viewer of adverts. The way we use the internet to search for information may be changing rapidly in the AI era, but the mindless doomscrolling that we are all familiar with seems to be here to stay.

When an analyst pressed on the need to generate a healthy return on invested capital across the AI initiatives, Zuck responded that Meta is focused on building experiences and monetising them when they get to scale. Meta’s track record in this regard is exceptional, but the investment case requires a great deal of trust.

The challenge is that every big tech executive is asking for patience and trust from investors, with capex bills mounting and return on investment still in question for many of the AI-related initiatives. While software as a service businesses flounder and hardware players such as Nvidia (and now even SanDisk and Intel) shoot for the stars, Meta finds itself somewhere in the middle.

Trading nearly 24% off the 52-week high, Meta’s share price is back to where it was a year ago. But it’s also achieved a compound annual growth rate (CAGR) of 13.6% over five years, beating the S&P 500 and demonstrating that Meta is able to adapt to changes in how people use the internet.

To be fair, with a CAGR over the same period of 26.9%, Google owner Alphabet has demonstrated sector-leading adaptability. But you now have to fork out a price/sales multiple of 11 times to buy Alphabet, while Meta sits at only seven times. This means I’m quite happy to still have Zuck’s big dreams as a core position in my portfolio.