Meta’s push into cloud computing means Wall Street has to prepare for lower margins

Meta CEO Mark Zuckerberg is setting the stage for a significant shift as the company explores the cloud computing market, a realm characterized by tighter profit margins compared to its flourishing online advertising sector. While major players like Amazon, Microsoft, and Google have thrived in this space, Zuckerberg has recently hinted at Meta's potential entry. On Wednesday, CNBC’s Jim Cramer revealed that Meta plans to monetize its surplus computing power by offering it to external clients. The company is currently weighing options, considering whether to provide access to its AI models or simply sell raw computing capacity, as reported by Bloomberg. This move has sparked optimism on Wall Street, resulting in a notable 9% surge in Meta's stock price, marking its most significant rally in over five months. Investors have been eager for Meta to diversify its revenue streams, especially as it seeks to capitalize on its substantial investments in advanced data centers and AI infrastructure. Karan Ramchandani, managing director at Post Oak Group, expressed that exploring this revenue avenue aligns with the company's strategic roadmap, emphasizing that competing in this market is a logical progression. During a shareholder meeting in May, Zuckerberg acknowledged that a cloud computing initiative is certainly a possibility. Earlier, he noted that numerous companies have expressed interest in purchasing computing capacity from Meta at a premium. Despite the recent stock boost, Meta had just concluded its fourth consecutive quarterly decline. In April, the company raised its 2026 capital expenditure forecast by $10 billion, now totaling $145 billion, partly funded through a $25 billion bond sale coinciding with its first-quarter earnings announcement. Paul Meeks, head of technology research at Freedom Capital Markets, highlighted concerns regarding Meta's cloud ambitions, suggesting that while the company has built capacity for its own needs, it has yet to effectively monetize AI applications. Currently, a staggering 98% of Meta's revenue still derives from digital advertising, with the financial benefits of its AI investments primarily enhancing its advertising capabilities. Zuckerberg is keen to reshape perceptions, with cloud computing emerging as a pivotal new venture. In May, Meta's shares climbed nearly 4% following the announcement of new subscription services for Instagram, Facebook, and WhatsApp, alongside two offerings for its Meta AI application and website. As the generative AI boom continues to unfold, cloud infrastructure remains a highly sought-after resource, yet few companies can deliver such services at scale. Industry leaders like Amazon Web Services, Microsoft Azure, and Google Cloud have successfully built extensive businesses by allowing companies to outsource their computing needs. Mark Mahaney, an analyst at Evercore, believes that Meta is unlikely to directly compete with these hyperscalers. Instead, he anticipates that Meta may follow the path of emerging cloud firms like CoreWeave and Nebius, which focus on providing AI-specific computing products. The competitive landscape is heating up, especially with companies like SpaceX, which has made significant strides in offering computing capacity through lucrative partnerships. Brian Schechter, a partner at Primary Venture Partners, noted parallels between Meta and SpaceX, particularly in their substantial investments in training AI models on proprietary infrastructure. However, some investors remain wary of the potential impact on Meta's profitability. The transition to cloud services generally necessitates a robust enterprise sales and support framework, and the profit margins in this sector are considerably lower than those from Meta's advertising operations. With a gross margin of 82%, Meta boasts one of the highest margins in the tech industry, but as seen with Google, building a profitable cloud service is a lengthy and challenging endeavor. Meeks cautioned that while Meta currently enjoys a premier business model, any ventures outside of online advertising could dilute its profitability. He remarked that it would be wiser for Meta to focus on monetizing AI through higher-margin products rather than entering the fiercely competitive arena of cloud infrastructure.