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The artificial intelligence (AI) space is red-hot right now. Companies across all industries are looking to take advantage of the technology, and are investing heavily to gain an edge over the competition. That is 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 crowded with competition, one company is separating itself from the pack. Meta Platforms (NASDAQ: META) is making great strides across different aspects of the AI field, and its performance over the competition shows.
Let’s find out why now is a profitable opportunity to invest in Meta as the long-term AI narrative unfolds.
The profit machine is at work
One of the most appealing aspects of Meta is how efficiently managers run the business. In 2023, Meta revenue grew 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 solid financial profile, Meta is well placed to invest profits back into the business as well as reward shareholders.
Invest for the future
During Meta’s fourth-quarter earnings call in February, investors learned how the company is using its cash pile. For starters, it has increased its share buyback program by $50 billion. This is heartening to see as it could suggest that managers view Meta stock as good value.
But perhaps more exciting was the announcement of a quarterly dividend. Many high-growth technology 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 uses its cash flow is in the world of artificial intelligence. Like many enterprises, Meta relies heavily on sophisticated graphics processing units (GPUs) from Nvidia. However, Meta has long hinted that the company is investing in its own hardware. Earlier this month, Meta announced that an updated version of its training and inference chip, called MTIA, is now available.
This is important for two reasons. Namely, in-house chips will allow Meta to “manage the entire stack” and reduce its reliance on third-party semiconductors. Additionally, given the company’s knowledge base of data 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 to advertising campaigns through the power of productive AI.
Compelling valuation
Meta competes with a number of players in the social media landscape. Alphabet is one of the company’s main competitors given that it operates the two most visited websites in the world: YouTube and Google. However, in 2023 Alphabet only grew its core advertising business by 6% year on year. In contrast, Meta’s advertising segment grew by 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 justify the premium.
Additionally, given that Meta’s price-to-free cash flow ratio of around 31 actually trades relatively in line with its 10-year average of 32, the stock may not be as expensive as it seems.
Overall, I’m optimistic about Meta’s aggressive ambitions in artificial intelligence—an investment that has yet to deliver. The AI narrative is going to be a long-term story. But I see Meta as extremely well-suited to capitalize on secular themes that boost AI, and benefit across its entire business.
The combination of dividend, share buybacks, steady cash flow, and compelling AI play makes Meta stand out in a highly contested AI landscape. I think now is a great opportunity to grab shares in Meta and prepare to hold them for the long term.
Should you invest $1,000 in Meta Platforms right now?
Before you buy stock in Meta Platforms, consider this:
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions at Alphabet, Meta Platforms, and Nvidia. The Motley Fool has posts on Alphabet, Meta Platforms, Nvidia, and Pinterest and recommends it. The Motley Fool has a disclosure policy.
A Once-in-a-Generation Investment Opportunity: 1 Amazing Artificial Intelligence (AI) Stock to Buy Hand Over Fist was originally published by The Motley Fool in April
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