Meta Platforms Is Up 21% This Month, and Here Is What's Driving the Surge

We all know Meta Platforms (NASDAQ: META) as the ubiquitous social networking ecosystem. Investors are also familiar with its booming digital advertising platform. But there's something else that's moving the needle these days.

As of July 16, Meta shares are up 21% this month. This stellar performance is better than all the other Magnificent Seven stocks. It's a notable reversal from June, when shares dipped 11%.

Here is what's driving the surge that has added a whopping $270 billion to the company's market capitalization in July.

Image source: The Motley Fool.

The market likes the company's new AI strategy

Like its hyperscaler peers, Meta is sparing no expense when it comes to artificial intelligence (AI). Capital expenditures will be between $125 billion and $145 billion this year, according to company estimates. It's time to start monetizing this spending.

On July 1, Bloomberg reported that the company is building a cloud computing division under the Meta Compute initiative. It plans to sell its unused compute resources and/or host AI models that developers can use. This is an admission that the business has been spending too aggressively on AI infrastructure. It appears to have more capacity than it knows what to do with.

Founder and CEO Mark Zuckerberg understands that computing capacity might be the hottest commodity on the planet right now, and his company has access to this vital resource. If Meta can earn a better return selling this to outside customers as opposed to using it for its own operations, then it's a no-brainer decision.

Investors will appreciate the urgency to try to generate revenue soon. This is extremely relevant today, as Meta's first-quarter capex total of $19.8 billion amounted to a sizable 61% of its operating cash flow during the period.

Improving sentiment, but still a lot to prove

At the end of June, Meta shares traded at a price-to-earnings ratio of 20.5. Today, they trade at a multiple of 24.4. Market sentiment was certainly lower, but it has now improved, showcasing investor enthusiasm.

This also reveals that the market has higher expectations. All eyes continue to be on AI. Meta shareholders should listen to any commentary the management team provides on its new cloud venture, especially related to operational timelines and expected financial performance.

This relates to the bigger topic. The business will probably need to start providing more color on the overall returns it believes it can generate from its massive AI capex plans. Otherwise, the market will start to get jittery. This is the single most important variable to pay attention to, because it can tell investors whether Meta is spending with an eye on the potential payoff.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.