Meta Platforms' New Cloud Business Could Be a Game Changer for Its Stock

Meta Platforms (NASDAQ: META) has been one of the best companies at applying artificial intelligence (AI) to its core business to drive growth. However, the stock has nonetheless struggled amid investor concerns about its high spending on data center infrastructure.

The company helped allay investors' fears when it was announced that the social media giant planned to sell excess computing power and launch its own cloud business. The move would put it into the same business as Amazon, Microsoft, and Alphabet.

Like all three of those companies, Meta has a strong, growing core business that generates substantial operating cash flow. However, it has been their cloud computing units that have driven growth for these companies, as demand for both AI infrastructure services and solutions has been insatiable.

Image source: The Motley Fool.

Moving to the cloud

According to Bloomberg, Meta is still deciding whether to sell access to its computing infrastructure or host large language models (LLMs) in its data centers. Meta has developed its own LLMs, and many cloud providers offer their customers third-party AI models like those from Anthropic and OpenAI.

Regardless of which route it goes, the move into cloud computing demonstrates that there is currently so much demand for these services that it is difficult to overbuild your own AI infrastructure, since you can just rent it out to someone else. This is also something that Elon Musk's Space Exploration Technologies (a.k.a. SpaceX) has done, getting strong rates from other players in the field that need the capacity.

For the stock, it should let investors focus on Meta's core business, which has been hitting on all cylinders. Last quarter, the company saw its revenue growth accelerate, climbing 33% to $56.3 billion.

The growth was driven by a combination of increased ad impressions, which jumped 19% year over year, and higher ad prices, which climbed 12% year over year. Meta is using AI to improve its recommendation algorithm, which keeps users on its apps longer and allows it to serve more ads to them. At the same time, AI is helping advertisers better target and convert users, which is driving up ad prices.

Is Meta Platforms stock a buy?

Despite its strong and accelerating revenue growth, Meta trades at a forward price-to-earnings ratio (P/E) of only 18 times this year's analyst estimates. That's cheap for a leading company with that type of growth.

With the move into cloud computing helping ease concerns about overspending and bolstering its strong core business, Meta is one of my favorite AI stocks to own right now for the long term.

Geoffrey Seiler has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.