Social media giant Meta Platforms (NASDAQ:META) has grown remarkably, soaring approximately 490% in under two years. However, Meta recently saw its most significant market cap decline since 2022, shedding around $200 billion following its Q1 results. The stock received downward revisions in target prices across Wall Street. The crucial question now is whether to buy or sell. Personally, I view this as an opportunity to invest in the stock based on its AI-based growth trajectory. I believe it can keep rising.
Weak Revenue Outlook, Higher AI Spend Disappoint Despite Q1 EPS Beat
Meta’s Q1 adjusted earnings of $4.71 per share handily beat the consensus estimate of $4.32 per share. Also, earnings more than doubled year-over-year compared to earnings of $2.20 per share in the prior-year period. Revenues jumped 27% year-over-year to $36.5 billion, meeting consensus estimates by $36.2 billion.
The revenue jump was fueled by a 27% rise in Advertising revenue (accounts for 98% of total revenues) to $35.64 billion. However, the Reality Labs division (the division that invests in the Metaverse) continued to report losses, amounting to $3.85 billion for the quarter.
Despite the EPS beat, the stock experienced its largest single-day decline (15%) in over two years. This decline can be attributed to lower-than-expected revenue guidance and higher-than-expected capital expenditures (CAPEX) forecasts.
The Facebook, Instagram, and WhatsApp parent expects Q2 total revenue to range between $36.5-39 billion, while the consensus was pegged at $38.3 million. CAPEX is expected to increase to $35-40 billion versus the prior guided range of $30-37 billion. Further, expenses are expected to increase and are forecasted to continue to increase through next year. For FY2024, total expenses are predicted to range around $96-99 billion versus the prior guided range of $94-99 billion.
Meta Plans to Invest Heavily in Creating Massive AI Infrastructure
During the earnings call, CEO Mark Zuckerberg elaborated on Meta’s heightened investment plans in AI infrastructure. The company aims to inject billions into the AI space and develop its proprietary AI chips, thereby reducing dependence on chipmakers like Nvidia (NASDAQ:NVDA).
In terms of newer products, the company also announced that MetaAI, featuring Llama 3 (competing with Microsoft’s ChatGPT and Google’s Gemini), is poised to become the most efficient AI assistant. This innovation could represent a substantial business opportunity in the coming years, further contributing to revenue growth.
Meta’s AI investment plans align somewhat with its major competitors, who are also making substantial investments in the AI domain. While Alphabet (NASDAQ:GOOGL) reported CAPEX of $12 billion in the recently ended first quarter, Microsoft (NASDAQ:MSFT) spent $14 billion. Both Google and MSFT plan to escalate their CAPEX spending in AI in the upcoming quarters.
However, Google and Meta’s shares soared after their recent earnings. On the contrary, Meta’s shares plunged as their capital investments are still not visible in their revenue and earnings growth. For instance, Google and Microsoft’s capital investments in AI are yielding impressive growth in their cloud businesses. However, Meta’s Reality Labs business segment still remains unprofitable, with reported losses exceeding $45 billion since the end of FY2020.
In essence, while AI spending is translating into direct gains for Google and Microsoft, it’s taking Meta longer to show such returns, turning it into a capital-intensive, cash-sucking endeavor. Therefore, the following question arises: should investors wait and observe or buy the stock at current levels following the recent decline?
In the long run, Meta’s move to produce its own chips will likely benefit the company significantly by reducing costs associated with expensive GPUs procured from NVDA currently. Additionally, owning its AI infrastructure promises faster and more efficient processing of vast amounts of data for the social media giant.
Meta Stock Is Attractively Valued and Backed by Stable Free Cash Flows
In terms of its valuation, Meta is attractively valued. Currently, it’s trading at an attractive P/E ratio of 23.5x compared to much higher multiples of its peer group. For the sake of comparison, Microsoft is trading at a P/E of 35x, while Amazon (NASDAQ:AMZN) is trading at over 50x.
Despite elevated capital expenditures, Meta’s free cash flows remain healthy at $49.5 billion for the past 12 months, or 4.1% of the current market capitalization. It is worth noting that the company started a dividend for the first time in the preceding quarter and continued to buy back shares, implying that management is confident in the company’s fundamentals.
Is META Stock a Buy, According to Analysts?
The Wall Street community is clearly optimistic about the stock. Overall, META commands a Strong Buy consensus rating based on 39 Buys, three Holds, and one Sell. Meta Platforms stock’s average price target of $530.93 implies 11.73% upside potential from current levels.
Conclusion: Consider Current Stock Price Weakness as a Buying Opportunity
Social media giant Meta has built a vast user base over time, establishing itself as the clear industry leader. Its steady position among the world’s “Magnificent 7” mega-cap stocks is well-deserved, supported by the continued growth in advertising revenue per user. Notably, Meta’s revenues and margins have been growing impressively, and the integration of AI infrastructure across its portfolio is poised to drive revenues even higher in the coming years.
For those who missed out on Meta’s remarkable stock rally (second only to NVDA) over the last two years, the current dip presents a buying opportunity, in my view. I personally plan to buy the stock and hold it for the long term.