Meta Platforms: Riding The AI Wave (NASDAQ:META)

Over the last few years, Meta Platforms, Inc. (NASDAQ:META) has been a controversial stock and a very volatile investment. The social media giant has now reinvented the business and is poised to ride the AI wave higher while still struggling to live up to its new name. My investment thesis remains ultra Bullish on the stock after the 2-month pause above $300 and the unleashing of new innovations in the AI space.

Meta Connect 2023

Meta already had a promising future with Reels boosting social media advertising and the potential of the Metaverse. Suddenly, AI has taken over the opportunity sphere, pushing the Meta Quest 3 and Reels into afterthoughts for the business.

The company announced new AI tools at the Meta Connect 2023 event, including personal AI assistants with 28 AI personality characters. While a lot of work is focused on large language models and generative AI tools like ChatGPT from OpenAI, a real big opportunity could exist in these personal AI assistants under Meta AI. Meta plans to implement assistants that can interact with users over all of their platforms: Facebook, Instagram, and WhatsApp.

Deepwater Asset Management did a study a few months ago highlighting the huge opportunity in personal AI assistants. The investment managers predicted over a trillion dollar market opportunity in Personal AI.

Based on a survey, users appeared willing to pay on average a few hundred dollars for a personal AI assistant. The amount seems massive, but a lot of people already spend $240/year on ChatGPT Plus.

The math is simple. The U.S. and EU have 869 million people 18 or over. The math comes out to a $1.25 trillion market opportunity for personal AI assistants based on the amounts people were willing to spend according to the survey results.

Meta is incorporating personal AI into their social media sites, so the actual money might end up being made via advertising. Though, a lot of social media sites are making progress at charging subscriptions, such as Snapchat+, from Snap (SNAP), with 5+ million subscribers now that originally included AI chat functions into the subscription service.

Meta currently has a revenue base of $130 billion and Alphabet/ Google (GOOG, GOOGL) equally has a revenue base of $300 billion. Both of these large tech companies are attacking the AI market, and a trillion dollar opportunity is massive for even these tech giants.

Overcoming Bad Habits

The biggest frustration with the Q2 earnings report from Meta was a continued push into spending on the Metaverse. The company launched the Quest 3, but Meta forecasts spending even more on the money burning segment that is already losing at a $15 billion annual run rate.

Baird analyst Colin Sebastian forecasts the Quest 3 doing $3 to $4 billion worth of revenues in the next 12 months. The major problem here is that the AR/VR device costs $500 and might not have a positive gross margin.

The Reality Labs division only produced $0.6 billion in revenues in the 1H’23 and $2.2 billion during 2022. The new AR/VR device is definitely expected to boost category revenues, but the profit picture isn’t likely to improve due to the potential for these devices to be sold at a loss.

Even with the Reality Labs division holding back earnings by an estimated $5 per share, Meta is still the cheapest tech giant, trading at a forward P/E multiple far below Apple (AAPL) and Microsoft (MSFT).

Meta appears poised to benefit from the AI wave far better than Apple with no real plans and compete with Google and Microsoft in this area.

The stock trades at 18x 2024 EPS targets of $16.44, and the elimination of the Reality Labs losses would boost EPS up to $21 per share. Meta only trades at 14x normalized EPS targets.

The stock has bounced substantially off the lows from late 2022. Meta still hasn’t hit a new all-time high from the levels above $380 back in 2021, and this push into AI and some upside from the Metaverse division would boost the stock.

Takeaway

The key investor takeaway is that Meta Platforms, Inc. remains exceptionally cheap, with AI becoming another driver of growth. The company is entering the personal AI assistant category where the market opportunity could be large whether the company monetizes the usage via advertising or eventually introduces a subscription fee.

The stock has been stuck around $300 for a couple of months now. After the market selloff, Meta appears poised to make the next run. Several analysts hiked price targets and the average analyst estimate now up at the old all-time high appears the next path for the stock.