Recently, the stock market has shifted away from megacap technology stocks to other industries. For example, Meta Platforms (NASDAQ: META) has fallen roughly 12% in just a few weeks. No groundbreaking news about the company has come out; sometimes, stocks just go out of style. After all, the stock market is essentially a popularity contest in the short term, even if business performance drives the bus over the long haul.
Not all dips are worth buying, but Meta Platforms has a compelling case, even if the tech giant is up significantly over the past few years. This magnificent company has artificial intelligence (AI) -driven growth potential and is becoming a bargain that investors should consider buying hand over fist.
Here is what you need to know.
AI is everywhere in Meta's business
Meta makes the lion's share of its money by serving ads to the 3.24 billion people who use Facebook, Instagram, WhatsApp, and Threads daily. But there is so much going on underneath the surface at Meta, and AI could play a significant role in helping the company maximize its potential. Meta has various AI products and technologies.
AI tools are enhancing its digital advertising business. For example, Meta says its AI tools can increase ad reach fivefold by customizing the ad's audience. More effective ads create a superior customer experience, making advertising more profitable for Meta. The company delivered 20% more ad impressions in the first quarter of 2024 at a 6% higher price per ad.
Meta has also woven Meta AI (a ChatGPT-like chatbot) into its social media apps to drive engagement. Meta AI can answer prompts, guide users to content, and connect people. Again, increased engagement directly translates to a more profitable advertising business.
Some of Meta's AI use takes place outside the social media app ecosystem. Meta has waded into wearable technology, including augmented reality headsets and smart glasses. Meta's Quest headset products have an estimated 86% market share, and competing products like Apple 's Vision Pro have seemingly missed the mark . Meta's smart glasses are doing well enough that the company is reportedly seeking a stake in Ray-Ban's parent company, which Meta partnered with on the hardware.
Meta has a business unit devoted to AI research, which includes work in computer vision and robotics, among other things. This seemingly plants long-term seeds of opportunity.
Why Meta's bottom line is about to explode higher
Meta's AI ambitions haven't been cheap; critics have gotten on CEO Mark Zuckerberg for spending tens of billions of dollars on computer chips and data centers to support AI technology. These investments have spiked Meta's capital expenditures, which have approached nearly 30% of the company's revenue at times:
META Capital Expenditures (TTM) data by YCharts
You could argue that such spending underlines Zuckerberg's conviction in AI and its importance to Meta's future.
Only time will tell how right Zuckerberg is. The good news is that Meta is still remarkably profitable, even if its AI business unit, Reality Labs, is still losing money. Reality Labs' operating losses were $3.8 billion just in Q1. Yet, analysts believe Meta's earnings will still grow to over $20 per share this year, up from $14.87 in 2023. Simply put, Meta's ad business is that good .
Meta's AI investments won't weigh earnings down forever. Eventually, these investments will provide a satisfactory return, or Meta will stop spending the money. Either way, AI investments will likely moderate and ease, sending Meta's earnings higher as a result.
The case for a compelling valuation
Perhaps that logic is why analysts expect Meta to grow earnings by over 19% annually for three to five years. The million-dollar question is: Is that enough growth to justify buying Meta's stock today? Unequivocally, yes.
You can look at this two ways. First, Meta's stock trades at a forward P/E of just under 24 today. That is comfortably below the stock's long-term average despite Meta's clear business quality and multiple AI irons in the fire. Second, the stock's PEG ratio of 1.2 signals a cheap stock for a business expected to grow earnings by 19% annually. Generally, I feel comfortable buying at PEG ratios of 1.5 or less, and most companies aren't as dominant and profitable as Meta.
META PE Ratio data by YCharts
The recent rotation away from big technology stocks has firmly dropped Meta into bargain territory. Long-term investors, especially those looking for a company where AI adds value but isn't an all-or-nothing bet on new technology, should consider scooping up Meta stock while it's on sale.
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. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Meta Platforms. The Motley Fool has a disclosure policy .
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