[HOTSPOT ANALYSIS] Meta’s Investment in Scale AI: An Ambitious Step Towards AI Dominance

Source: TradingKey

TradingKey - One of the most prominent deals in the recent months is Meta investing $14.3 billion in Scale AI, a growing AI startup with a potential to be a prominent player in the whole AI ecosystem in the coming years.

The Deal

For the amount mentioned, Meta is set to take a stake of 49% in the startup, which means they will not fully incorporate the company and will keep the management working independently. Scale’s Chief Executive Officer Alexandr Wang will be joining the social media company to work on its AI efforts.

Existing investors will not be selling any of their shares in the deal, but they are being diluted as a result of the new shares issued to Meta, the person said. Scale plans to distribute a portion of Meta’s multibillion-dollar investment to shareholders in the form of a dividend, with the payout divided based on how much of the company each investor owns.

What is Scale AI

ScaleAI is a company that provides data and infrastructure solutions to AI scalers – primarily data labeling, but also model evaluation and model lifecycle management. Data labelling is the process of connecting raw data with meaningful information, so this can help improve the overall quality of the input into LLM, therefore improving the overall quality of the LLM output.

Major customers of Scale AI are Microsoft, Meta, OpenAI and government agencies such as US Department of Defense.

The company achieved $870 million revenue in 2024 and is expecting $2 billion in 2025 (more than 120% annual growth). It is also expected that half billion revenues of Scale AI will be from Meta itself. After the Meta deal, Scale is valued at more than $29 billion, including the money raised.

How does this help Meta long-term?

In terms of fundamentals, Scale AI will not make a significant impact on the Meta’s financial statements ($2 billion revenue for Scale AI expected in 2025 vs $165 billion revenue for Meta in 2024). However, the strategic implications for Meta’s AI ambitions are quite significant.

Firstly, Scale AI can help the parent company of Facebook and Instagram to access high-quality data which can boost the capabilities of the proprietary Llama LLM model.

Secondly, by deepening their partnership with Scale AI, Meta can prevent the competition’s access to the same set of data. This will be an effective way to challenge the Microsoft-OpenAI partnership (ChatGPT/Copilot) which is still seen as a leader among all the AI models on the market. Insiders already mention that OpenAI, still a significant customer currently, is slowly moving away from Scale AI, looking for alternatives.

Last but not least, ScaleAI may reduce the need for Meta to be dependent on lower-quality external data providers and achieve a more predictable cost structure.

Will this be a trend?

The deal between Meta and Scale AI might be the beginning of a new secular trend within the AI field. As many players are currently competing by trying to create the most capable and comprehensive AI model, future advances in LLM may depend more on the quality of data (input) rather than the architectural innovations.

Investment Outlook

We will not see a material change in META’s financials and valuation with this deal. However, the sentiment around the stock could improve significantly, especially if the company successfully cut the gap between their Llama model and ChatGPT.

META is the fifth largest holding of Vanguard. If you want to find more about the other holdings of Vanguard, as well as the top holdings of some of the most renown investors on Wall Street, please check our Star Investor tool on our website.

Source: TradingKey