Meta’s AI strategy focused on Muse growth as legal challenges dent earnings

Meta CEO Mark Zuckerberg said that more than 10 million people in the U.S. and Canada have set up Muse accounts in a month and a half and growth remained strong, but the company’s stock had a rough start Thursday in response as costly legal challenges mount.

The company reported third-quarter earnings late Wednesday, with better than expected revenue at US$64.60 billion, ahead of Wall Street estimates of $63.37 billion, according to data compiled by LSEG. Meta also projected fourth quarter revenue between $73 billion and $76 billion, above estimates of $73.73 billion.

After the results were released, Zuckerberg said on a conference call he expected Muse would eventually serve “billions of people” who would potentially generate more revenue than the average Meta user, forecasting the venture would give rise to the kind of network effect that helped build his social media empire.

“Part of the reason why we’re not just charging everyone up front to use this is we want to establish this Muse network, and we think that it’s going to be more valuable for people at scale when there are a lot of people and businesses using Muse,” said Zuckerberg.

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In their financial report, Meta said they “remain focused on improving Reality Labs profitability” and forecast its losses would narrow next year to around $15 billion “as we reallocate investment toward other priority areas, primarily AI.”

The early popularity of Muse and the release of a competitive new series of AI models have helped Meta justify its spending to investors, even though some enterprises are restricting the agent’s access over security concerns.

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“The market has shifted from punishing Meta for spending to rewarding it for having a compelling product story,” said Jesse Cohen, senior analyst at Investing.com.

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Still, Zuckerberg acknowledged that the costs of offering Muse were higher than those associated with many of Meta’s other new products over the years, and said the company would move to monetize the agent “somewhat sooner on this than our normal playbook.”

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Meta CFO Susan Li forecast the company’s AI businesses would begin contributing incremental revenue in 2027 and become “a meaningful source of revenue diversification over time.”

The executives also emphasized that AI would be the focus moving forward for Meta’s loss-making Reality Labs unit, which had led the charge on the company’s vision to build the “metaverse,” an immersive digital world that inspired its name change from Facebook to Meta in 2021.

Meta introduced new non-voting shares on Wednesday to help fund the social media giant’s costly AI expansion, as executives laid out their vision for organizing the company’s future around its nascent AI agent business.

The company has been pouring money into advanced chips and data centres to compete more aggressively with AI market leaders OpenAI and Anthropic, propelling it to the vanguard of an emerging consumer AI agent race while also eroding its historically strong free cash flow.

Shares of the Facebook and Instagram parent plummeted more than six per cent as trading commenced Thursday on Wall Street as investors shifted their focus to the company’s legal issues.

Legal challenges are mounting, including a $25 billion penalty ordered by a judge in New Mexico earlier on Wednesday after a jury found Meta misled the state’s residents about ​how it shared user data with third parties and enforced policies on hate speech and misinformation in a case related to British political consulting firm Cambridge Analytica.

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The $25 billion penalty is a “stark reminder of the current legal challenges Meta faces, which will continue into next year,” Emarketer senior analyst Minda Smiley said.

“Questions and concerns related to privacy and safety will only ramp up should AI agents become more mainstream, which could ultimately hurt Meta considering its reputation in this area.”

In August, Meta agreed to pay as much as $18 billion over a decade and restrict teenagers’ use of Facebook and Instagram to settle claims by nearly all U.S. states alleging that Meta’s platforms were designed to addict children.

Meta posted diluted earnings per share of $3.83 in the quarter, a figure that would have been $7.40 had it not been for a $9.89 billion charge related to the August settlement.

The agreement removed a significant regulatory hurdle that had weighed on Meta’s stock and allowed the company to avoid a potentially lengthy trial that could have exposed more internal documents about its treatment of young users.

Still, Meta warned in its guidance on Wednesday that it continued to face scrutiny and U.S. trials around “youth-related issues” that could impact its financial results.