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By Aditya Soni and Kanchana Chakravarty
(Reuters) -Shares of Meta Platforms sank 13% on Thursday, sparking a selloff in big technology stocks after the social media firm signaled its costly bet on AI could take years to pay off.
The drop was set to erase nearly $170 billion from the company's market value and triggered a fall of 3% to 4.2% in shares of AI-focused Microsoft and Alphabet, both of which report earnings after market close.
The focus on AI spending, however, sparked a more than 2% jump in shares of Nvidia, Broadcom and Marvel Technology, which analysts have called the picks and shovels of the generative AI boom. Intel, which has missed out on the AI-led rally, was up 0.7% ahead of earnings.
Meta CEO Mark Zuckerberg, who floored Wall Street last year with his cost-cutting drive, said on a post-earnings call that costs would grow "meaningfully" over the coming years before the company makes "much revenue" from some of its AI products.
That stoked investor fears that Zuckerberg was plunging Meta into another costly endeavor at a time when its augmented and virtual reality business was losing billions of dollars each quarter.
"Investors were caught off guard by higher capital expenditure, exacerbated by slightly softer second-quarter revenue guide. As such, shares are entering the 'penalty box,'" Baird Equity Research analysts said.
Meta forecast April-June revenue below estimates and raised the bottom end of its 2024 total expense forecast by $2 billion on Wednesday. It also raised the top end of its capital expenditure view as it invests in data centers essential to its efforts to catch up with AI frontrunners OpenAI and Microsoft.
The dour expectations follow a series of smash-hit earnings that helped Meta nearly triple its stock in 2023 and powered the biggest one-day market value gain by any company in Wall Street history, of $196 billion, in February after its maiden dividend.
Still, several analysts were positive on the investments, pointing to AI-driven engagement on content such as Instagram Reels and the warm reception for its virtual assistant Meta AI and early versions of its latest large language model, Llama 3.
"We think this time it is different," Evercore ISI analysts said. "This investment cycle comes from a position of strength, as management continues to see a healthy ad demand environment into Q2 and improving user engagement."
Overall, 19 analysts lowered their price targets on the stock, while 13 raised their view, according to LSEG data. The median price target now stands at $525, which is about 6% higher than its previous close.
The stock has a 12-month forward price-to-earnings ratio of about 23.12, compared with Microsoft's 31.17 and Alphabet's 22.07. It has gained nearly 40% so far this year, comfortably above the benchmark S&P 500 index's 6% gain.
"Being on the offensive with investment spending is generally great, but in internet it is very hard to underwrite which of those investments will pay back and when," Bernstein analyst Mark Shmulik said.
"All of this culminates with investors wondering just how long this investment cycle will last, whether the opportunity and payback is real, all against a backdrop of decelerating growth."
(Reporting by Siddarth S and Kanchana Chakravarty in Bengaluru and Amanda Cooper in London; additional reporting by Johann M Cherian; Editing by Alun John, Janane Venkatraman and Anil D'Silva)
