Meta's plan to launch a cloud business eases the biggest overhang on the stock

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Meta's plan to launch a cloud business eases the biggest overhang on the stock Published Wed, Jul 1 20263:19 PM EDTPaulina Likos@paulina_likos Meta Platforms on Wednesday gave investors what they needed to gain renewed confidence in the company's mounting artificial intelligence spending — and its stock. Meta is preparing to launch a cloud infrastructure business that would sell excess AI computing power and AI models to outside customers, Jim Cramer confirmed Wednesday, throwing its ring in the competitive cloud market with hyperscaler titans like Amazon Web Services, Alphabet's Google Cloud and Microsoft's Azure. Bloomberg News first reported on Meta's plans. Shares of the Facebook and Instagram parent soared more than 9% Wednesday to $617 per share, among the biggest gainers in the S & P 500 . The upbeat reaction is hardly a surprise to us — Jim has recently stepped up his calls for Meta to start a cloud business, predicting the struggling stock would soar in response. "Until today, our feeling was, what the heck is Meta doing?" Jim said Wednesday on CNBC. Now, he added, "they're going to use that [compute] power to offer a profitable enterprise to their customers." Meta shares entered Wednesday down almost 7% for the year, trailing both the S & P 500 and the tech-heavy Nasdaq Composite, which were up 9.55% and 12.4%, respectively. It was also the second-worst performer in the "Magnificent Seven," ahead of only Microsoft, which has been caught up in the broader "AI is eating enterprise software" narrative. Shares of Amazon and Google, the two other cloud giants, were up 5% and 14.6%, respectively. Meta has faced growing questions on its plan to monetize its enormous levels of capital spending on servers, data centers and network infrastructure. In the past, Meta has defended its investments in AI computing by saying it's improving its advertising business for Facebook and Instagram. But it's started to severely crimp Meta's free cash flow, reaching levels that made some investors uncomfortable considering its narrow and economically sensitive source of revenue. In 2024, Meta's capex totaled $37.2 billion, before rising to $69.6 billion last year. That's projected to almost double this year, to $135 billion at the midpoint of its guidance range. For comparison, Microsoft said in April that it plans to spend roughly $190 billion on capex this calendar year. While that above Meta's outlook, the key difference is Microsoft has a cloud business to serve. A similar defense applies to Google's $180 billion to $190 billion in projected 2026 capex, as well as Amazon's guidance for $200 billion . Building a cloud business, however, offers Meta another path to making money from all its AI spending, Jim explained Wednesday, which should help alleviate some of the market's concerns and improve attitudes toward the stock even before revenue starts landing in its coffers. In other words, Meta no longer would be a one-trick pony. Better yet, this new endeavor of cloud computing has proven to be an immensely profitable business for other companies. This isn't a complete surprise. In late May, Meta CEO Mark Zuckerberg said launching a cloud computing business was "definitely on the table." With the stock still languishing in recent weeks, Jim argued that Meta needed to start moving in that direction. In this week's Sunday column, he wrote : It is building out [computing] power, but for whom? We don't know. Maybe just its own advertising model? That's an ugh, and that's why its stock is going down. A coherent statement from Zuckerberg right now, one that says, "We aren't going to spend this data center money and wreck our balance sheet," or, even better, "We are going to monetize the power by building a web services system," — either one would get the stock out of the doldrums, which makes it a tantalizing investment still. To be sure, questions remain about Meta's plan to sell access to computing power. For Meta to successfully compete in cloud computing, it will require far more than just owning AI data centers, according to tech analysts the Investing Club interviewed before Bloomberg's report Wednesday morning. Tech industry analyst Ben Bajarin said investors should distinguish between two very different kinds of compute businesses. One is renting out AI infrastructure, which he called "bare metal" computing. In this case, customers would bring their own software and run it on Meta's hardware. The other is building a full-service cloud platform complete with software, developer tools and enterprise services like AWS, Microsoft Azure and Google Cloud. "The question really is, are they offering infrastructure to third parties, or are they trying to layer software on top of that," said Bajarin, chief executive and principal ana