This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Big tech has not been shy about opening the pocketbook for artificial intelligence (AI)-related investments over the last few years. While the billion-dollar price tags are what made headlines, the real value of these investments came with their strategic intent. Many of these deals involved alliances with big tech leaders, who swiftly integrated a host of new AI-powered products and services into their legacy ecosystems.
Until recently, Meta Platforms (NASDAQ: META) took a different approach. It chose to allocate its capital expenditure (capex) budget to custom silicon chips, developing new wearable tech, and building its own large language model (LLM). However, following its massive $14.3 billion bet on start-up Scale AI, it's fair to wonder if Meta's approach to building an AI empire is too little, too late.
Let's explore some of the more notable AI deals that big tech has made in recent years. From there, I'll detail the underlying thesis behind Meta's interest in Scale AI, and why the timing of this deal is so important.
Is Meta late to the AI party?
Microsoft was the first major tech company to make a mark in the AI landscape. In early 2023, the company structured a multi-year investment worth $10 billion in ChatGPT developer OpenAI. The strategic rationale behind this deal was to integrate OpenAI's services into Microsoft's Azure cloud platform.
Amazon followed in Microsoft's footsteps. Amazon initially invested $4 billion into creating an OpenAI competitor, a start-up called Anthropic. Similar to Microsoft's integration of ChatGPT into the Azure ecosystem, the partnership with Anthropic has so far revolved around leading cloud platform Amazon Web Services (AWS). Amazon has now invested a total of $8 billion into Anthropic since the initial investment a couple of years ago.
How have these deals panned out so far?
It's one thing to outlay significant capital toward new assets. But how beneficial have these deals been for big tech so far? Per Microsoft's most recent earnings report, revenue from Azure and other cloud services grew by 33% year over year. Management pointed out that 16 points of this growth (roughly half) were attributable to AI services.
Meanwhile, since Amazon's investment in Anthropic in September 2023, AWS has grown its annual revenue run rate by 27% while expanding operating income margins by roughly 9 percentage points.
While this growth is impressive, there are some subtle nuances that investors should be aware of as well. First, OpenAI recently signed a new cloud deal with Alphabet. OpenAI has also been working closely with Oracle on Project Stargate, a $500 billion AI infrastructure initiative.
These new relationships could suggest that OpenAI is looking for strategic opportunities beyond its existing relationship with Microsoft. For that reason, it's hard to project how accretive Microsoft's investment in OpenAI will be going forward.
On top of that, the Anthropic and OpenAI deals primarily revolve around cloud computing services. While this is a critical component of the AI narrative, it's not entirely related to or competitive with Meta -- which mostly seeks to monetize consumer engagement through social media, gaming, and the metaverse.
Meta is scaling for the future, and its timing looks pretty smart
Then there's Meta Platforms' deal with Scale AI. One of the pillars supporting this deal was that it helped pave the way for a new component of the company's ecosystem, known as Meta Superintelligence Labs (MSL). Scale AI CEO Alexander Wang now leads MSL as Chief AI Officer. In addition to the Scale AI team, Meta has hired a number of technologists and researchers from OpenAI, GitHub, Anthropic, and Alphabet to build the MSL team.
Meta's largest source of revenue and profits stems from its advertising empire. With billions of people engaging with its apps on a daily basis, advertisers are eager to get in front of Meta's users.
However, Meta's advertising model relies on predictive analytics around which ads users actually click on. This data is used to train recommendation models in order to feed ads that will actually convert to clicks and sales from its users. Scale AI is a data labeling platform that can be used to augment and fine-tune Meta's existing ad targeting techniques.
Although Microsoft and Amazon have been able to jump-start their respective cloud operations thanks to their aggressive and early moves in the AI start-up landscape, I think Meta may have been more calculated in the development of its own roadmap.
In my eyes, Microsoft could face rising competition from Oracle and Alphabet in the cloud arena. Meanwhile, investors will likely want to see how Amazon plans to integrate AI beyond AWS to source further growth from its other businesses.
With Scale AI and a host of new hires now closely aligned across Meta's various applications and services, I think the company is uniquely positioned to bolster its existing AI platforms while others in the big tech landscape now face rising competition and may need to pivot.
While it may have looked like Meta's big tech peers were sprinting right by, I think the company's recent investments and creation of its new AI research lab were perfectly timed.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
