Meta Stock Is Still Too Cheap

On Friday, I called Meta Platforms' (NASDAQ:META) new AI personal agent, Muse, a game changer for the company. I didn't expect that would happen as soon as the next trading day.

Meta stock soared 11.4% on Monday after a Wells Fargo analyst raised his price target on the stock from $640 to $796, noting the success of the Muse Spark LLM and the new Muse assistant, and investors also seemed to react to Muse achieving the top spot in Apple's App Store.

Muse was released two weeks ago, but Wall Street suddenly seems to be waking up to its impact, even though it's been clear that the AI agent has been rapidly gaining adoption, with 600,000 downloads in the first five days after its release.

Today, the tailwinds from Meta's surge were strong enough to lift the broader AI sector, with CPU stocks like Arm, Intel, and AMD all soaring on the news, since agentic AI is closely tied to CPU demand. If Meta has the first breakout AI agent, CPU stocks are likely to benefit as AI agent usage drives more demand.

Image source: The Motley Fool.

What it means for Meta

With Monday's gain, Meta is now up 21% since Muse was launched, and the stock could have more room to run.

Investors have long been skeptical of Meta's AI strategy, especially as it's been losing close to $20 billion a year on Reality Labs, but the social media giant could have a big winner on its hands in Muse. The early response, with 600,000 downloads, is not unlike what ChatGPT experienced after its launch, and the reviews for Muse have been glowing as well.

CEO Mark Zuckerberg explained his commitment to free access, saying, 'We think that this thing is actually going to make you money and save you money, and that is how it's going to pay for itself."

Meta is already entrenched in social media, with roughly half the world as its user base. It's a key player in digital advertising and e-commerce, making it will positioned to monetize an AI agent, and Wall Street now appears to recognize that. Meta is charging $20-$100/month for Muse's premium tiers, but if the company can make Muse a must-have product, there will be plenty of ways to monetize it.

Finally, Meta has the potential to follow in Alphabet's footsteps, which soared after its Gemini LLM proved to be a serious competitor to OpenAI and Anthropic, with the stock essentially doubling in the second half of last year.

Meta is still a bargain

Meta has long traded at a discount relative to its growth rate. There's no simple reason for that, but investors seem to believe that the company isn't diversified beyond advertising, it faces regulatory threats, including the $17 billion settlement related to unsafe content for children, and it's burned a ton of money on AI, leading some investors to question Zuckerberg's instincts after the metaverse flop.

Currently, the stock trades at a price-to-earnings ratio of 25, which is still cheaper than the S&P 500, but the company is expected to grow much faster than the broad-market index. Meta is on track to grow revenue by 26.5% this year to $254.1 billion, and that doesn't include any impact from Muse, which could accelerate its growth in the fourth quarter and into next year.

Even without Muse, Meta stock looks cheap given its consistently strong growth in the core advertising business, but now the company looks poised to be a major player in AI thanks to Muse. If the momentum in Muse adoption continues, Meta could hit a $1,000 a share by the end of the year.

Wells Fargo is an advertising partner of Motley Fool Money. Jeremy Bowman has positions in Advanced Micro Devices, Arm Holdings, Meta Platforms, and Wells Fargo. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Arm Holdings, Intel, and Meta Platforms. The Motley Fool has a disclosure policy.