Is Meta's $65 Billion Spending Spree a Good Idea? Here's What History Suggests.

Over the last couple of years, businesses across every industry sector have become overwhelmingly enamored with artificial intelligence (AI). In particular, graphics processing units have become all the rage given their advanced computing power -- which is needed to train generative AI programs such as large language models.

At some point, you'd probably expect these investments to hit a peak or begin to plateau. After all, investors want to see a return on these massive infrastructure projects.

Well, apparently there is still more money to be spent for some of AI's biggest players. For example, Meta Platforms (META 0.35%) announced its capital expenditures (capex) could reach $65 billion in 2025, representing over 60% growth from last year. Much of that will go to AI infrastructure investments.

Below, I'm going to detail what Meta's $60 billion to $65 billion AI-focused passion project entails. Moreover, I'll dig into what happened the last time the company went on a spending spree and what history suggests could happen to Meta shares this year.

What is Meta's $65 billion capex plan all about?

During the company's fourth-quarter earnings call on Jan. 29, Wall Street analysts peppered Meta's executive leadership with questions related to this year's capex roadmap. Meta CEO Mark Zuckerberg and CFO Susan Li provided a lot of details about the proposed multibillion-dollar infrastructure project.

Li clarified the spending will be going to three main categories: servers, data centers, and networking equipment. This makes sense as Meta plans to double down on data center build-outs equipped with "large training clusters" of networking equipment. Specifically, Li mentioned the company will "further ramp adoption" of its custom Meta Training and Inference Accelerator chips designed in partnership with Broadcom.

While this level of investment is par for the course among the tech industry's biggest companies, investors may want a refresher on what happened the last time the company poured cash into its vision for the future.

What happened the last time Meta went on a spending spree?

Quick question: When was the last time you heard about the metaverse?

A few years ago, you may recall virtual worlds and spatial computing were hot topics in the financial world. The metaverse was supposed to change how people interact, and it promised myriad breakthroughs in how businesses across all industries would visualize and build new products.

Perhaps no other company bought into the idea of the metaverse as much as ... Meta Platforms. Up until Oct. 2021, the social media company was still known as Facebook. In 2022, Meta began investing aggressively in its Reality Labs business -- a segment featuring virtual reality headsets for gaming and entertainment.

Data by YCharts.

As the chart above shows, the company's capex increased significantly. This wouldn't be an issue on its own, but these investments took a major toll on Meta's profitability. Just look at the inverse relationship between the company's capex and earnings per share in 2022.

The hit to earnings led investors to sour on Meta stock, sending shares down 64% that year.

Why this time could be different

If you see the company's metaverse investments as a close parallel to its massive AI spending plan, history suggests the stock could be in trouble. However, there are some important details that explain why things may go differently this time around.

First, 2022 was a tough year for most tech companies. Inflation peaked around 9%, and the Federal Reserve began raising interest rates to curb rising prices. As such, just about all types of businesses were penny pinching and operating under radically tight spending protocols.

These dynamics impacted Meta's core business as its advertising revenue declined 1% in 2022. The combination of falling ad sales and rapidly rising costs from the metaverse drastically reduced the company's profitability as earnings per share fell 38% the same year.

Another reason the AI initiative could be different than the metaverse is due to how Meta is spending its money. The company over-hired in the Reality Labs business, which led to a series of sizable layoffs to right size its cost structure.

But for the new infrastructure spend, Meta's management noted the company is investing in areas to extend the useful life of its servers. In other words, Meta's $65 billion capex budget could yield a better return on investment down the road.

It should become pretty clear this year if the company's capex spending is outpacing sales, profits, and cash flow. For the time being, the best way to approach an investment in Meta is to keep an eye out for earnings announcements and any management commentary regarding the push into AI.