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The social media company's plan to become a cloud computing provider could shift the market's sentiment toward the stock.
Meta Platforms, a prominent AI hyperscaler, is reportedly shifting its long-standing strategy by planning to launch a cloud computing business. Unlike its competitors Alphabet, Amazon, and Microsoft, Meta has historically self-funded and utilized all its data center capacity for internal AI workloads, without directly monetizing this infrastructure. Recent reports indicate a major change in this policy, with Meta now intending to lease out its excess AI computing capacity to external clients. This move represents a significant departure from CEO Mark Zuckerberg's previous statements that Meta consumed all its internal capacity. The establishment of a cloud computing unit is anticipated to be a major turning point for the company's stock, introducing a new revenue stream and potentially altering market perception.
Cloud computing units are integral to the profitability of other tech giants. Amazon's cloud service, Amazon Web Services, for instance, accounts for nearly 60% of its operating profits, despite Amazon being primarily known for e-commerce. While Meta's new cloud business is not expected to match the immediate profitability of its peers, it will provide a crucial new revenue source, aiding in the funding of its extensive data center expansion. However, investors are cautioned to manage expectations, as CEO Mark Zuckerberg has indicated that Meta would only sell *excess* computing capacity, implying that a large portion of its data centers would still be dedicated to internal use, and new facilities might not be built solely for external clients. Therefore, this segment is unlikely to become as dominant a moneymaker for Meta as it is for other hyperscalers in the short term.
Investors are particularly enthusiastic about Meta's demonstrated flexibility in adapting its AI strategy, moving away from a previous tendency to adhere to underperforming business ideas. This strategic agility is a positive signal for the market. If Meta officially confirms this cloud computing initiative during its upcoming second-quarter earnings call on July 29, its stock is expected to surge. Currently, Meta Platforms trades at approximately 18.7 times forward earnings, which is a notable discount compared to the S&P 500's valuation of 21.7 times forward earnings. The introduction of a cloud computing plan could help Meta bridge this valuation gap, and its robust growth rate might even justify a premium valuation in the broader market. Given its current undervaluation and the potential for a significant strategic catalyst, Meta is considered a smart investment opportunity before its Q2 earnings report.