Why Meta Stock Investors Should Watch Its Bold Bet on Scale AI

Key Points

• Meta is investing over $14 billion in Scale AI, a data-labeling company used by AI model makers.
• However, the reasoning behind Meta's latest investment is about much more than getting in on Scale's growth.
• Through the deal, Meta helps throw its competition off balance and gain a proven superintelligence team leader.

In its latest multi-billion-dollar move, Meta Platforms NASDAQ: META has made a big investment in data-labeling company Scale AI. The tech giant will invest over $14 billion in Scale and gain a 49% stake in the company.

So, what does Scale AI do, and why has Meta decided to make this deal? Is it a smart decision, and what does it say overall about Meta’s AI priorities?

Scale AI: Infusing Human Understanding into AI

Scale AI’s business model is relatively simple. The company pays humans to use their knowledge to improve AI. This includes tasks like identifying objects in a picture so that an AI model can recognize them in the future. Tasks may also involve rating the quality of an AI model's response to a prompt. Some tasks are easy for anyone to do, while others require expert knowledge in a specific field. Ultimately, Scale gets paid by AI model developers for helping improve their models through human feedback.

However, some of the company’s biggest customers are already leaving due to the Meta deal. Alphabet NASDAQ: GOOGL subsidiary Google reportedly plans to terminate its relationship with Scale AI. Google accounted for approximately 17% of Scale’s total revenue in 2024. Magnificent Seven peer Microsoft NASDAQ: MSFT is also considering ending its relationship with Scale.

These decisions and considerations come because Meta competes with these companies in AI. The new investment might result in proprietary information about their AI strategies leaking to Meta. However, Meta had to know that these firms would seek to move away from Scale. So, why then would they invest over $14 billion in a company that stood to lose a massive amount of its revenue just days later? The answer is likely twofold.

Alexandr Wang: Meta’s New Superintelligence X Factor

According to Reuters, Meta’s main motivation for investing in Scale AI wasn’t necessarily to generate huge returns, but rather to add the company’s leader to its organization. Scale AI’s 28-year-old founder, Alexandr Wang, will leave Scale to lead Meta’s “superintelligence” team. Meta likely values Wang’s experience in building a multibillion-dollar AI business. It is evident that he can help monetize and promote the profitability of Meta’s AI initiatives.

Wang is technically knowledgeable, but his business expertise makes him stand out from other AI experts who have more scientific backgrounds. Analysts generally believe that Meta has made great use of AI when it comes to its advertising business. However, direct monetization of its LLaMa models and consumer-facing AI features has been minimal. Wang will likely work to further these initiatives.

Furthermore, Wang likely has a wealth of knowledge about how Meta’s competitors approach their AI models. Aside from Google and its Gemini model, OpenAI is also a Scale AI customer. Vahan Petrosyan is the Chief Executive Officer of SuperAnnotate, one of Scale AI’s competitors. Petrosyan believes that Scale has worked with around 70% of all AI models built. Thus, Wang and the team of experts he will bring to Meta could share valuable insights on a wide range of competitor strategies. However, there may be legal barriers. Still, this knowledge can help Meta improve its own strategy.

Another motivation for investing in Scale is exactly what has already transpired with Google. Meta is taking away a key ally from its competitors. Google and others clearly viewed Scale as a valuable partner; they wouldn't be paying it millions of dollars otherwise. Now, these firms will have to pivot and find another partner to fill Scale AI’s role. At minimum, this could slow the progress that these companies are making in their AI initiatives, giving Meta the opportunity to gain ground.

Scale AI: Meta’s Monetization Power Move

Although $14 billion is far from chump change, Meta has deep pockets. It ended last quarter with over $70 billion in cash, around $50 billion in debt, and generated over $52 billion in free cash flow over the last 12 months. The company has more than enough money to stomach the deal, but it remains a bet that Meta needs to pay off.

The failure of Meta and Wang to create a formidable force in AI would set the firm back years. That would be far more damaging than a $14 billion investment that generates lackluster returns. Overall, it is much too early to say whether this decision is the right one. However, investors should view Wang’s business-oriented focus positively. It is a sign that when it comes to AI, one thing sits at the top of Meta’s priority list: making money.