With a YTD gain of around 64%, Meta Platforms is the second-best performer among the so-called “Magnificent 7” shares trailing only Nvidia. It held the same position last year also amid the broad-based tech rally.
While tech shares rallied across the board in 2023 amid the artificial intelligence (AI) euphoria, things have been different this year with investors getting selective about AI plays. Meanwhile, while Nvidia is the biggest beneficiary of the AI pivot and the chip designing giant is raking in billions of dollars selling its AI chips, analysts see Meta also among the early winners even as most other tech companies struggle to justify their massive capex towards the emerging technology.
Analyst sees Meta as a ‘net winner’ in AI
Stephen Yiu, chief investment officer of Blue Whale Growth Fund believes that Meta along with Nvidia is a “net winner” in AI spending.
“Compared to two years ago, when we exited Meta at the end of January 2022, we were very concerned about the Metaverse. Because Metaverse was something very different that maybe would take 10 years to see through,” said Yiu speaking with CNBC. He added, “But with AI, you can actually see the benefit quite quickly.”
Notably, Meta’s Reality Labs segment which is building the metaverse and sells the company’s Quest VR headset has been posting massive losses which widened to $4.4 billion in Q2.
Metaverse losses are piling up
The segment lost $16.1 billion, $13.7 billion, and $10.2 billion respectively in the previous three years. For 2024, the company has warned that losses in the segment will increase “meaningfully.” However, despite pressure from shareholders, Meta’s CEO Mark Zuckerberg has gone ahead with these investments and has said that they are a key long-term driver for the company.
He listed AI as a short-term growth driver and Meta is among the rare companies that have started to reap the benefits of their AI capex. During the Q3 earnings call, Meta CFO Susan Li said that Meta AI has reached 500 million monthly active users and is on track to become the most used AI assistant globally by the end of this year.
Zuckerberg on the AI opportunity
During the earnings call, Zuckerberg said, Improvements to our AI-driven feed and video recommendations have led to an 8% increase in time spent on Facebook and a 6% increase on Instagram this year alone.” He emphasized that in September, over a million advertisers used its AI tool to create 15 million ads.
Meta would also use AI to enhance user experience. “I think we’re going to add a whole new category of content, which is AI generated or AI summarized content or kind of existing content pulled together by AI in some way. And I think that that’s going to be just very exciting for the – for Facebook and Instagram and maybe Threads or other kind of Feed experiences over time,” said Zuckerberg during the earnings call.
While Meta did not provide any quantitative guidance for 2025, the company expects to increase its outlay towards AI capex. Meta shares fell despite posting better-than-expected Q3 earnings as the company’s commentary on AI capex spooked investors.
Some analysts are bullish on Meta’s AI pivot
That said, analysts are not too perturbed despite Meta increasing its AI capex and Deutsche Bank analyst Benjamin Black maintained his buy rating and assigned a $650 target price following the Q3 release.
“To us, it is becoming increasingly evident that the scaled investments in core AI (and Gen AI) are having a tangible positive impact on advertising performance, driving an ever-widening gap between Meta and its peers,” said Black in his note.
He added, “We think this moat is still in the early innings and should continue to manifest itself in the form of improving ROAS for Meta’s advertising partners and, as a result, growing wallet share over time.”
However, some advice caution with Scotiabank saying the increase in Meta’s headcount and AI capex shows a “lack of a clear AI monetization strategy.”
Some like Morningstar have a more balanced view. “We believe ad campaigns on Meta can derive greater value using GenAI tools, which Meta can capture via its potent monetization engine,” said the firm’s analyst Malik Ahmed Khan in his note.
Khan added, “At the same time, we expect near-term margins to remain pressured as Meta’s capital expenditures flow through its income statement as depreciation charges and it continues to spend heavily on AI talent.”
Is AI a bubble?
A section of the market believes that AI is a bubble just like the dot com era. However, many others are bullish on the opportunity and believe that it would lead to higher revenues and profits for tech companies investing in the technology.
Meta incidentally is a top AI pick for Bank of America. “We think Meta’s Al driven ad improvements still have several quarters to play out. We see strong drivers for 2025 growth, including: 1) Growing usage trends driven by Al and video, 2) Al solutions driving higher ROI and incremental ad spend…” said Bank of America in its note last week.
Overall, while it remains to be seen whether AI has the potential to be the game-changer as many are touting it to be, companies like Meta have started to reap the rewards of their AI pivot.
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