Companies have spent tens of billions of dollars in a race to advance artificial intelligence capabilities over the past two years. Several companies have emerged as big winners in the early days of the generative AI boom, but not all of them will maintain their leading position.
But I predict one tech giant will come out ahead in artificial intelligence in the long run. It has the resources to make the required investments in AI capabilities and a business model that will allow it to make the most out of its efforts. Moreover, the CEO made becoming the leading AI company in the world a priority for the business.
Here's why Meta Platforms (NASDAQ: META) will become the AI leader in the long run.
Image source: Getty Images.
Meta stands out from the crowd
There are three ways Meta's differentiating itself from other tech companies working to capitalize on the AI opportunities. Combining these factors has enabled Meta to improve its AI capabilities quickly and they all benefit one another over time, creating a virtuous cycle.
1. Open-sourcing its foundation model
Meta's Llama foundation models are open source. Since Meta isn't trying to make money directly from licensing its model like OpenAI or other developers, it can afford to offer it for free to independent developers.
If Meta can increase the adoption of Llama among developers through its open-source license, it feeds the entire ecosystem of building and using the model. Everything from increasing the efficiency of the model at both the software layer and the hardware layer to expanding the toolsets that work with the model becomes easier with a broader user base. That can save Meta both time and money in the long run.
2. Using AI across all of its products
Meta uses AI across almost everything it builds. Its social media apps, its advertising business, and its metaverse products all tap into the AI models Meta builds to improve user experiences and operational results.
CEO Mark Zuckerberg said content recommendation continues to improve as it expands its recommendation AI models to more general areas. There's still a lot of room to expand, which means it could continue to see improvements in overall engagement. Engagement increased last quarter, as it saw a 10% year-over-year improvement in ad impressions.
Meta's also able to integrate AI with its advertising platform. It can use its models to target advertisements and generative AI features already help create and test new versions of ads. Zuckerberg sees AI reaching the point where a business can simply set a business objective and budget and it takes care of the rest.
Meta's also building new AI products, including its Meta AI chatbot, which it integrates into Instagram and Facebook. Meta's goal is to make it the most-used AI assistant by the end of the year. It also released a tool to help businesses build their own chatbots, AI Studio, which could ultimately lead to business messaging monetization opportunities.
3. Spending massive sums of cash
Supporting Meta's AI development is the amount it's investing in building out data centers to train and run its AI models. Meta plans to spend between $37 billion and $40 billion this year on capital expenditures , and it expects that number to climb significantly higher next year to support AI research and development.
Only a handful of companies are spending more on capital expenditures -- namely, the hyperscale public cloud providers. Importantly, Meta is only providing data-center capacity for itself.
But that spending is fully supported by the strength of its business. "We are in the fortunate position where the strong results we're seeing in our core products and business gives us the opportunity to make deep investments for the future," Zuckerberg said during Meta's second-quarter earnings call.
Indeed, the company's free cash flow totaled $10.9 billion last quarter, and Meta ended June with $58 billion in cash on hand with just $18 billion in debt.
The stock looks like a great opportunity right now
Despite the strong results and the potential for it to lead the next leg of AI development, Meta's stock remains reasonably priced relative to many hot AI stocks .
Shares currently trade at a forward price-to-earnings ratio of 25, which puts it near the bottom end of the group of trillion-dollar tech stocks. Its efforts should support double-digit revenue growth for years to come while maintaining high margins thanks to the operating leverage inherent in its business. The biggest factor weighing down its profit will be increased depreciation expenses from the step up in capital expenditures. As such, cash flow should remain strong.
Investors looking for one of the best ways to invest in AI should take a close look at Meta stock.
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 Levy has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy .
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