Key Points
When pundits and investors talk about artificial intelligence (AI) hyperscalers, Meta Platforms (NASDAQ: META) always gets included in the group. However, the other three members of the big four — Alphabet, Amazon, and Microsoft — have something in common that Meta doesn’t share: cloud computing business units.
Those other three have been monetizing their data centers by leasing capacity to outside clients, while Meta has been self-funding its build-out, and expecting to use all the capacity it can create in-house. There’s been no direct monetization path in sight.
However, that may be changing. According to reports, Meta now intends to build a cloud business and lease out its excess AI computing capacity. That’s a major shift in policy, as CEO Mark Zuckerberg previously noted that Meta was using all of its capacity for internal workloads.
If Meta is truly launching a cloud computing unit, that could result in a major turnaround for the stock.
Cloud computing has transformed these other three companies
Cloud computing is a major part of all three of the other hyperscalers’ businesses. Take Amazon, for example. While most people think of it as primarily an e-commerce business, nearly 60% of its operating profits come from Amazon Web Services, its cloud computing unit. If Meta does start a cloud business, it’s unlikely that it would be as profitable as those of its peers immediately. Still, it would create a new revenue source for the company that would help it fund its ongoing data center build-out.
However, investors also should keep their expectations in check. Zuckerberg has been clear that Meta will only sell its excess computing capacity — if it has any. So, just because they’re likely to get into the cloud business does not mean that a large share of its data centers will be devoted to that purpose, nor that it will build new data centers specifically for external customers. Therefore, we should not expect Meta’s cloud computing business unit to be the type of major moneymaker it is for the other three hyperscalers.
The biggest factor investors are excited about is that Meta is showing a willingness to shift its AI strategy if what it’s doing isn’t working. The company has been known to stubbornly cling to business ideas that aren’t panning out as hoped. This change in practice reflects the flexibility investors want to see, and if the company confirms it during its upcoming second-quarterearnings callon July 29, Meta stock could skyrocket.
Right now, Meta is trading at about 18.7 times forward earnings, a significant discount to the S&P 500 (SNPINDEX: ^GSPC), which trades at 21.7 times forward earnings. The company’s cloud computing plan could help it close that gap and maybe even lead investors to value it at a premium to the broader market, as its growth rate would certainly indicate it deserves a more generous valuation.
I think Meta is a smart buy now before it reports Q2 earnings, as the stock is still cheap, and a changing AI strategy could be the catalyst that sends it higher.
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Keithen Drury has positions in Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.
