Meta Platforms is spending a ton of cash to pursue generative AI.
Meta Platforms (META 3.44%) might be probably the most misunderstood firms on the market. It’s persistently judged by what it does with 5% of its enterprise slightly than how the opposite 95% is performing. This misunderstanding was on full show after Meta reported implausible Q3 earnings, just for the inventory to drop proper after the report.
As a result of Meta Platforms is closely investing within the synthetic intelligence (AI) area, some traders are panicking. Nonetheless, I believe that is the fallacious approach to take a look at it. As an alternative, I am assessing the corporate to see if it is an AI chief, as a management place might be price billions of {dollars}.
Meta’s Llama AI mannequin is rising in reputation
First, let’s speak about what Meta does higher than anybody else. Its core enterprise — social media websites like Fb and Instagram — is a money cow. It thrives off of promoting income, which was up 19% yr over yr in Q3. Of the $40.6 billion in income that Meta generated, $39.9 billion got here from promoting on its social media websites.
Clearly, that is the primary a part of the enterprise traders needs to be specializing in, but it is easy to get distracted by Meta’s aspect hustles.
Traders haven’t got the most effective experiences with Meta’s aspect hustles. Meta spent billions of {dollars} constructing out its imaginative and prescient for the metaverse, just for nothing to come to fruition in that area. Now, it is pouring a ton of cash into its AI fashions. However Meta’s generative AI model, Llama, has really been fairly profitable.
Llama has seen adoption because the constructing block of inner AI fashions for AT&T, Goldman Sachs, and Shopify. From January 2024 to July, Llama utilization grew tenfold, which demonstrates speedy adoption.
Meta is wanting to capitalize on this utilization by creating the following era of the mannequin. At the moment, Llama is in its 3.2 model state, however Meta is creating Llama 4. The computing energy mandatory to practice Llama 4 versus Llama 3 is anticipated to be about 10 instances as a lot.
In its quest to produce the most effective generative AI mannequin, Meta conveyed to traders that they need to “count on vital capital expenditures development in 2025.” This involved many traders as they need Meta to give attention to being a money cow and returning income to shareholders via dividends and share repurchases.
Nonetheless, that is shortsighted considering, and if Meta can develop a main AI mannequin, it should far outweigh the advantage of a dividend or share repurchase program. The stakes are too huge not to have a top-notch generative AI mannequin, and with Meta’s near-term success in having shoppers undertake it, traders should not consider this as the following metaverse. As an alternative, this might be the following Fb.
Meta’s inventory is not overpriced
After the drop, Meta’s inventory nonetheless is not terribly low cost, nevertheless it’s a lot extra cheap than a few of its huge tech friends.
META PE Ratio (Forward) knowledge by YCharts
At 25 times forward earnings, Meta trades at a premium to the S&P 500, which trades for 23.8 instances ahead earnings. Nonetheless, these ahead earnings projections are a bit muddy, as traders have little concept what its financials will seem like over the following 12 months due to hefty AI spending.
Nonetheless, after Meta is completed with this AI spending part, it should seemingly preserve its place as a social media powerhouse and have a vital consumer base utilizing its AI mannequin. Whereas I do not know what that enterprise will totally seem like from a monetary standpoint, I am assured it will likely be a extra spectacular model than the Meta you see as we speak.
As a end result, I think Meta is a fantastic stock to buy right now, however traders could have to wait a few years to see what the following model of Meta Platforms appears to be like like.
Randi Zuckerberg, a former director of market improvement and spokeswoman for Fb and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Idiot’s board of administrators. Keithen Drury has positions in Meta Platforms and Shopify. The Motley Idiot has positions in and recommends Meta Platforms and Shopify. The Motley Idiot has a disclosure policy.