The artificial intelligence (AI) space is red hot right now. Companies in every sector want to take advantage of the technology and are investing heavily to gain a competitive edge. This also applies to social media, where advertisers want to reach the right target group for them.
While the social media landscape is packed with competition, one company stands out from the rest. Metaplatforms (NASDAQ: META) is making strides in various aspects of the AI realm, and its performance against the competition is showing.
Let’s take a look at why investing in Meta now is a lucrative opportunity as the long-term AI story plays out.
The profit machine is running
One of the most attractive aspects of Meta is how efficiently management runs the company. In 2023, Meta’s revenue grew 16% year over year to $135 billion. However, the company increased revenue from operations by a whopping 62% year over year to $46.7 billion.
By expanding its operating margin, Meta also achieved significant growth in operating income. 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 and reward shareholders.
Investing for the future
During Meta’s fourth-quarter earnings call in February, investors learned how the company is deploying its cash pile. For starters, it has increased its stock buyback 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 fast-growing technology companies are not in a financial position to pay dividends – or instead choose to reinvest their profits in 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 field of artificial intelligence. Like many companies, Meta relies heavily on advanced graphics processing units (GPUs). Nvidia. However, Meta has been hinting for some time 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 number of reasons. With internal chips, Meta can “control the entire stack” and reduce its dependence on third-party semiconductors. Furthermore, given the knowledge base of data the company collects from social media platforms Facebook, Instagram and WhatsApp, these new chips position Meta to improve its targeted recommendation models and advertising campaigns through the power of generative AI.
A convincing appreciation
Meta competes with a number of players in the social media landscape. Alphabet is one of the company’s biggest competitors, as 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 rose 16%.
While Meta’s price-to-sales ratio (P/S) 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.
Furthermore, the stock may not be as expensive as it seems, as Meta’s price-to-free cash flow ratio of around 31 is actually trading relatively in line with its 10-year average of 32.
Overall, I’m optimistic about Meta’s aggressive ambitions in artificial intelligence – an investment that has yet to materialize. The AI story will be a long-term story. But I see Meta as extremely well-equipped to capitalize on secular themes that fuel AI and benefit the entire company.
The combination of a dividend, share buybacks, consistent cash flow and a compelling AI play make Meta stand out in a highly contested AI landscape. I think this is a great opportunity to pick up shares in Meta and prepare to hold it for the long term.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions at Alphabet, Meta Platforms and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Meta Platforms, Nvidia, and Pinterest. The Motley Fool has a disclosure policy.
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