Mark Zuckerberg Says He's Betting Big on AI Compute Even as Meta's Free Cash Flow Craters. Here's What Investors Should Watch.

Shares of Meta Platforms (NASDAQ: META) are down about 16% year to date as investors focus on the near-term cost of accelerating capital spending for artificial intelligence (AI).

Even after an 18% year-over-year decline in trailing-12-month free cash flow, CEO Mark Zuckerberg is sticking with an aggressive AI compute build-out. "As AI usage in our products and businesses continues to ramp, we continue to invest aggressively in infrastructure to meet the demand," he said during the recent earnings call.

At roughly 18 times forward earnings estimates, the valuation looks attractive. But for the stock to deliver meaningful upside, investors should track whether AI-driven spend is translating into measurable returns, such as stronger ad pricing and higher user engagement. The company may also have opportunities outside its core business to monetize this spending.

Image source: The Motley Fool.

AI has made a big impact on advertising

Meta's core ad business is humming. In the second quarter, revenue from its family of apps climbed 27% year over year to $59 billion. The global average price per ad rose 12%, a sign that AI tools are improving performance for advertisers -- and giving Meta more pricing power.

Engagement is trending the right way, too. Instagram saw double-digit growth in time spent on the app, while Facebook saw time spent increase 9% worldwide.

Meta also highlighted momentum for its AI assistant, with daily interactions in Meta AI up 60% after the integration of its flagship Muse Spark model.

So far, strong revenue growth is validating Zuckerberg's move to double down on compute. The key question for investors is whether those trends hold as capital spending stays elevated.

Short-term pain for long-term gain

Through its Meta Compute initiative, the company announced a new 1-gigawatt data center with BlackRock aimed at training internal models, supporting ad growth, and enabling personalized agents and new products.

Data centers and chips seem to only be getting more expensive. Second-quarter capital expenditures (capex) hit $30 billion, nearly wiping out free cash flow, which totaled just $1.7 billion. Management's full-year guidance calls for capex of $130 billion to $145 billion.

But CFO Susan Li shared an important perspective about the pace of spending that probably doesn't get enough attention from investors: "The industry has under-built historically for the wave of AI adoption, making existing capacity, including our own, extremely valuable."

Meta isn't just building for today's demand -- it's trying to lock in compute capacity that can power AI features for years. That's classic short-term pain for long-term gain.

There's still a risk of overbuilding, but Meta may have a lucrative backup plan. Zuckerberg noted that the company is already seeing strong interest from other businesses in using its compute -- and at prices well above Meta's cost.

If Meta can monetize that capacity through its ad engine -- and potentially via third-party demand -- the market may be underestimating the long-term revenue and earnings from these investments. At this valuation, Meta's stock is worth considering.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.