Meta’s plan to launch a cloud business eases the biggest overhang on the stock
Meta Platforms on Wednesday gave investors what they needed to regain confidence in the company’s growing AI spending and its stock. Jim Cramer confirmed Wednesday that Meta is preparing to launch a cloud infrastructure business that will sell extreme AI computing power and AI models to external customers, making its ring in the competitive cloud market with hyperscaler giants such as Amazon Web Services, Alphabet’s Google Cloud and Microsoft’s Azure. Bloomberg News first reported Meta’s plans. Shares of the parent company of Facebook and Instagram rose more than 9% to $617 per share on Wednesday, ranking among the S&P 500’s biggest gainers. The optimistic reaction comes as no surprise to us — Jim recently stepped up his calls for Meta to build a cloud business and predicted the struggling stock would rise in response. “Our thinking to date has been: What the heck is meta doing?” Jim said on CNBC on Wednesday. Now he added: “They will use it. [compute] Meta stocks entered Wednesday down nearly 7% for the year, trailing the S&P 500 and the tech-heavy Nasdaq Composite, up 9.55% and 12.4%, respectively. Meta shares were also the second-worst performer in the “Magnificent Seven,” ahead of Microsoft, which has been caught up in the broader “AI is eating enterprise software” narrative. The other two cloud giants, Google, increased by 5 percent and 14.6 percent, respectively. Meta has defended its investments in AI computing in the past, saying it improved its advertising business for Facebook and Instagram. But it began to severely constrain Meta’s free cash flow, to levels that made some investors uncomfortable due to its narrow and economically sensitive source of income. In 2024, Meta’s capex reached $37.2 billion, and last year that figure is expected to nearly double to $135 billion at the midpoint of its target range. For comparison, Microsoft said it plans to spend about $190 billion on capital expenditures this calendar year. But the key difference is that Microsoft has a cloud business to serve. Its 2026 capex forecast is $190 billion, as well as Amazon’s target of $200 billion Jim explained on Wednesday that building a cloud business gives Meta another way to monetize all its AI spending, which will help ease some of the market’s concerns and improve attitudes towards the stock even before revenues start coming into the coffers. Even better, this new cloud computing effort has proven to be an extremely profitable business. In late May, Meta CEO Mark Zuckerberg said that building a cloud computing business was “definitely on the table.” As stocks have remained weak in recent weeks, Jim argued that Meta should start moving forward in this week’s Market column: Improvements continue. [computing] Power, but for whom? We don’t know. Maybe it’s just their advertising model? That’s too bad, and that’s why its shares are falling. Zuckerberg now has a consistent statement: “We’re not going to spend this data center money and destroy our balance sheet” or better yet, “We’re going to turn power into money by building a system of web services” — both of which would save the stock from recession, which still makes it an attractive investment. Of course, questions remain about Meta’s plan to sell access to computing power. Meta will need much more than having AI data centers to compete successfully in cloud computing, according to technology analysts interviewed by Investment Club on Wednesday morning ahead of Bloomberg’s report. Tech industry analyst Ben Bajarin said investors should distinguish between two very different types of computing businesses. One is the leasing of AI infrastructure, which he calls “bare metal” computing. In this case, customers would bring their own software and run it on Meta’s hardware. The other is to build a full-service cloud platform, complete with software, developer tools, and enterprise services like AWS, Microsoft Azure, and Google Cloud. “The real question is: Are they offering infrastructure to third parties, or are they trying to layer software on top of that as well,” said Bajarin, CEO and principal analyst at Creative Strategies, a Silicon Valley-based research firm focused on the technology industry. he said. He also hosts “The Circuit” podcast, covering semiconductors and the AI computing industry. Bloomberg’s report suggests Meta is considering both approaches. One offering would be similar to AWS Bedrock by allowing developers to access AI models hosted on Meta’s infrastructure, while another would involve selling similar raw computing capacity to neocloud providers like CoreWeave or, more recently, SpaceX. Elon Musk’s rocket and artificial intelligence company struck a deal with Google last month under which Google will pay $920 million a month for additional computing power. SpaceX, which is building a massive data center near Memphis, Tennessee, made a similar deal with Anthropic. The timeline for when Meta’s cloud business will happen depends on how ambitious its cloud plans are, Bajarin said. If the company rents the artificial intelligence infrastructure, the offer will be available faster because customers will supply their own software. On the other hand, building a full-fledged cloud platform like AWS or Google Cloud will take much longer. That’s because he says building a cloud business to serve outside customers is more difficult than building data centers for internal workloads. Bajarin said customers need software that allows them to distribute workloads across their own infrastructure, an area in which established cloud providers have invested for years. Paul Meeks, head of technology research at Freedom Capital Markets, said Meta’s investment-grade balance sheet gives it a big advantage over new AI infrastructure providers that rely heavily on debt to fund growth. But what Meeks questioned was whether AI companies would want to host sensitive workloads on infrastructure owned by a competitor that also develops its own AI models and applications. He outlined how AI labs like OpenAI and Anthropic might think about this issue: “If Meta has a product that competes with us, then people will be hesitant to buy their cloud services,” said Meeks, who has been involved in the technology for decades. At the same time, Bajarin argued that demand for AI computing is so strong that customers will “take computing anywhere they can get it” and that if Meta takes the bare-metal approach, it will work. And if it’s after a full-fledged cloud service, Meta has relationships with tons of businesses that use Instagram, Facebook, and WhatsApp; We believe this will turn them into potential cloud customers. Ultimately, we are pleased that Meta is taking steps to explore ways to commercialize its AI infrastructure and demonstrate to Wall Street that it is responsive to investors’ concerns. At the same time, there are bigger questions about how ambitious the company plans to be; Does it want to be just another vendor in a compute-starved market or is it building a full-service cloud platform? Either way, the move is a welcome step in Meta’s efforts to turn its massive AI investments into meaningful long-term returns for investors. (Jim Cramer’s Charitable Trust is long META, AMZN, GOOGL. See here for a full list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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