Great News for Meta Stock Investors

Meta Platforms (NASDAQ:META) has faced at least two significant issues over the past year that have weighed on its stock. First, many investors aren't convinced that its massive artificial intelligence (AI)-related spending will yield the kind of return the company is hoping for. And since these investments are shrinking margins and earnings, skeptics have been running for the hills.

Second, Meta Platforms has faced lawsuits over its social media websites and apps. Plaintiffs allege that they have harmed users, especially younger users. The good news for Meta is that the company has made significant progress in overcoming one of these headwinds while keeping its core business mostly intact.

Image source: The Motley Fool.

A (not so) massive settlement

A coalition of U.S. states and territories was suing Meta Platforms in lawsuits over social media addiction. On Aug. 26, they agreed to a settlement worth up to $17.1 billion that Meta will pay. The tech giant will also be required to install stronger guardrails to protect young users across its apps. These will include daily usage limits, the ability to opt out of personalized algorithms, and stricter parental controls.

Now, $17.1 billion sounds like a lot of money. For most corporations, it is. Not so for Meta Platforms, especially since it won’t have to pay it all at once (the base amount is payable over a decade). In the second quarter, the company's revenue increased by 28% year over year to $60.8 billion. Meta's net income was $15.8 billion, down 14% from the year-ago period (largely due to AI-related investments). So, the amount Meta will pay is roughly equal to a single quarter's worth of earnings, but divided across dozens of quarters.

It's not at all a catastrophic outcome compared to the alternative. Meta Platforms could have spent years fighting these lawsuits in court. For all we know, it might have incurred far more than $17.1 billion if it had lost, not to mention the damage a drawn-out, years-long legal battle might have done to its public image and reputation. Sure, the company's recently announced settlement doesn't leave its reputation intact, but it could have been worse if Meta's top executives had been forced to take the stand one after another.

It's worth noting that this isn't the first time Meta has dealt with significant legal problems. In 2019, the company paid a $5 billion fine imposed by the U.S. Federal Trade Commission for violating consumer privacy. At the time, that was also about a quarter's worth of net income for Meta Platforms (then known as Facebook). And the social media giant has performed more or less in line with the S&P 500 since that $5 billion fine was announced.

What's next for Meta Platforms

Meta may have addressed one of its biggest risks, but what about the other? The company's spending could lead to even lower margins and earnings over the medium term. That is, unless Meta finds a way to turn its investment into genuinely lucrative monetization opportunities. The company has already improved its core advertising business thanks to AI, but there may be more to come. Meta Platforms is betting that AI agents are the future.

CEO Mark Zuckerberg envisions highly personalized AI agents that everyone will use every day. If that is indeed the next stage of the AI revolution -- as others, like Nvidia's (NASDAQ:NVDA) CEO Jensen Huang, have also argued -- Meta could be in a great place to benefit. The company boasts 3.60 billion daily active users across its websites and apps. It has ample data from these users to craft personal AI agents, and launching these agents within its already vast ecosystem could help the company hit the ground running.

The result could be significantly improved engagement within Meta's ecosystem, and even higher ad-related revenue. Meta Platforms is reportedly also considering renting out excess AI computing capacity, which will likely boost revenue, margins, and profits, since this business is in high demand right now, and it wouldn't have to spend significantly more to do so. My view is that Meta will eventually justify its AI investments, and, given that it has successfully addressed arguably its most important headwind, the stock looks like a strong buy.

Prosper Junior Bakiny has positions in Meta Platforms and Nvidia. The Motley Fool has positions in and recommends Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.