Does This News Make Meta Platforms Stock a Buy?

Meta Platforms (NASDAQ: META) has not performed well this year. With the company spending small fortunes on its artificial intelligence (AI)-related ambitions, many investors are worried that its investments won't lead to significantly stronger financial results and will only squeeze its profits and margins. However, some recent developments suggest that Meta Platforms' AI spending might pay off after all, just not in the way some people imagined. Let's look into a potential new business venture the tech leader is exploring and what investors should make of it.

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An attractive new growth driver?

According to reports, Meta Platforms is exploring selling excess computing capacity. It could do so in several ways, including renting out GPU (Graphics Processing Unit) capacity it isn't using, or the Facebook parent company might also grant access to its internally developed large language models through the cloud. This new initiative could put Meta Platforms in direct competition with companies like Amazon, Microsoft, and Alphabet that currently dominate the cloud computing industry. And if it can successfully establish itself in this field, Meta Platforms would likely become an even stronger company. Here are two reasons why.

First, the tech giant currently generates almost all of its revenue from its advertising business. Although this is a strong, high-margin operation, launching a new and successful cloud segment would help the company diversify its revenue base. Second, AI infrastructure spending should continue growing at a good clip over the next few years (at least). That means increasing demand for, among other things, precisely the sort of services Meta Platforms is considering offering through this new business venture. That's probably why the company is exploring doing so in the first place: there is a large opportunity here. And even if it has to battle it out against other major hyperscalers, there might just be more than enough room in this market for Meta Platforms to carve out a niche.

Is Meta Platforms stock a buy?

Although Meta Platforms gaining a foothold in this market would likely be great for the company, we aren't there yet. In the meantime, despite its poor stock performance, the tech leader has posted strong financial results this year. In the first quarter, Meta Platforms' revenue increased 33% year over year to $56.3 billion, while its earnings per share rose 62% to $10.44. Meta Platforms has already benefited from AI, as the company has used the technology to meaningfully grow engagement across its family of websites and apps, while also helping companies get more bang for each advertising buck.

My view is that Meta Platforms' AI-related spending is already justified, and even if, by some chance, it fails to have a bigger impact on the business, Meta Platforms can regroup and reduce expenses, just as it did when its metaverse ambitions failed to materialize. Meanwhile, the company still boasts more than 3 billion daily active users, is slowly ramping up new opportunities like paid messaging on WhatsApp, and could conjure up even more in the future. Meta Platforms' deep ecosystem and innovative capabilities remain among its biggest advantages. And the company also benefits from a moat thanks to network effects. These are all great reasons why, despite its poor stock performance this year, Meta Platforms' shares are worth investing in.

Prosper Junior Bakiny 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.