One area that is ripe for disruption in the world of AI is advertising. Meta sticks out as a compelling opportunity in this space.
The artificial intelligence (AI) space is red-hot right now. Companies across every industry are looking to capitalize on the technology, and are investing heavily to gain an edge over the competition. That’s true in the social media space, where advertisers are keen to get in front of the right audience for them.
While the social media landscape is jam-packed with competition, one company is separating itself from the pack. Meta Platforms (META 0.06%) is making strides across various aspects of the AI realm, and its performance over the competition shows.
Let’s dig in to why now is a lucrative opportunity to invest in Meta as the long-term AI narrative plays out.
The profit machine is up and running
One of the most appealing aspects of Meta is how efficiently management runs the business. In 2023, Meta grew revenue 16% year over year to $135 billion. However, the company increased income from operations by a whopping 62% year over year to $46.7 billion.
By expanding its operating margin, Meta recognized significant growth on the bottom line as well. Last year, the company generated $43 billion in free cash flow. With such a robust financial profile, Meta is well-positioned to invest profits back into the business as well as reward shareholders.
Image source: Getty Images.
Investing for the future
During Meta’s fourth-quarter earnings call in February, investors learned how the company is deploying its cash heap. For starters, it has increased its share repurchase program by $50 billion. This is encouraging to see as it could imply that management views Meta stock as a good value.
But perhaps more exciting was the announcement of a quarterly dividend. Many high-growth tech companies are not in a financial position to pay a dividend — or instead choose to reinvest profits into research and development or marketing strategies. Meta’s new dividend certainly sets the company apart from many of its peers, and is a nice sweetener for long-term shareholders.
Another way Meta is using its cash flow is in the realm of artificial intelligence. Like many enterprises, Meta relies heavily on sophisticated graphics processing units (GPUs) from Nvidia. However, Meta has been hinting for a while that the company is investing in its own hardware. Earlier this month, Meta announced that an updated version of its training and inference chips, called MTIA, is now available.
This is important for a couple of reasons. Namely, in-house chips will allow Meta to “control the whole stack” and scale back its reliance on semiconductors from third parties. Additionally, given the company’s knowledge base of data that it collects from social media platforms Facebook, Instagram, and WhatsApp, these new chips put Meta in a position to improve its targeted recommendation models and ad campaigns through the power of generative AI.
A compelling valuation
Meta competes with a number of players in the social media landscape. Alphabet is one of the company’s top competitors given that it operates the world’s top-two most visited websites: YouTube and Google. However, in 2023 Alphabet only grew its core advertising business by 6% year over year. By contrast, Meta’s advertising segment increased 16%.
While Meta’s price-to-sales (P/S) ratio of 10 is higher than many of its social media peers, the company’s growth in the highly competitive and cyclical advertising landscape may warrant the premium.
META PS Ratio data by YCharts
Additionally, considering Meta’s price-to-free-cash-flow ratio of about 31 is actually trading relatively in line with its 10-year average of 32, the stock might not be as expensive as it appears.
Overall, I am optimistic about Meta’s aggressive ambitions in artificial intelligence — an investment that is yet to play out. The AI narrative is going to be a long-term story. But I see Meta as extremely well-equipped to take advantage of secular themes fueling AI, and benefiting across its entire business.
The combination of a dividend, share buybacks, consistent cash flow, and a compelling AI play make Meta stick out in a highly contested AI landscape. I think now is a great opportunity to scoop up shares in Meta and prepare to hold for the long term.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Meta Platforms, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Nvidia, and Pinterest. The Motley Fool has a disclosure policy.
