Down 17%, Is Meta a Buy on the Dip?
Key Points
Meta is aggressively pursuing its AI dreams, investing heavily in the infrastructure build-out.
In recent months, investors have grown concerned about tech companies’ spending levels.
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Meta Platforms (NASDAQ:META) is one of the major players in this artificial intelligence (AI) revolution. Though the company's biggest source of income is advertising through its social media platforms, it has big AI dreams. Meta has spent billions of dollars on the build-out of its own data centers and just recently took a significant step toward the monetization of its investments -- the launch of its Muse personal AI agent and its Muse Wonder and Muse Wonder Full advanced models.
So, investors looking for AI stocks to buy may turn to Meta, and that's what they did from the start of this year through early September. But in recent times, that momentum has stalled, to be replaced by caution. The stock has slipped 17% from a peak last month amid general concerns among investors about spending on AI infrastructure. Some investors worry that an AI bubble has formed, and that any slowdown in the AI space could significantly hurt the biggest spenders.
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Meanwhile, Meta's earnings continue to march higher, thanks to advertising growth and its solid social media business.
Considering the full picture, is Meta stock a buy on the dip? Let's find out.
Image source: The Motley Fool.
More than 3 billion people use Meta apps daily
As I mentioned, when you think of Meta, you may think: Facebook, Messenger, WhatsApp, and Instagram. Those are the social media apps the company owns, and about 3.6 billion people worldwide use at least one of those daily. And this has built advertising strength for Meta. Advertisers, seeing how much time we all spend on Meta's apps, rush there to reach us.
This has resulted in earnings growth over time for Meta, and the company's investment in AI could seriously reinforce this revenue stream. That's because Meta's AI is making its social media apps more interesting, which will keep us on them longer, and AI is improving the advertising experience and results. All of this should please advertisers and progressively prompt them to increase their spending here.
Meanwhile, Meta's launch of the Muse AI agent and its advanced models represent additional sources of revenue. The personal AI agent is free to a certain extent, but those with greater usage needs may pay for a subscription. So far, the free app has proven to be popular, reaching 5 million downloads more quickly than ChatGPT and Claude after their launches.
Advances in earnings and advertising
Meta's recent earnings report further confirmed its earnings strengths, with revenue surpassing analysts' estimates and double-digit advances in ad impressions and ad prices. But investors frowned on Meta's ongoing high levels of spending on AI -- the company expects full-year capex to be in the range of $135 billion to $145 billion. That's narrowed from the earlier forecast of $130 billion to $145 billion. Meta reiterated that this spending story isn't over and it will continue to heavily invest beyond next year. This weighed on the stock, prompting declines after the earnings release.
Now, let's return to our question: Is Meta a buy on the dip?
We'll consider a couple of points here. Meta and peers are spending heavily on AI infrastructure as it's needed to accomplish their goals. Risk exists that the revenue opportunity won't justify such levels of spending -- it's impossible to predict what may happen in the future with 100% accuracy. And the S&P 500 as a whole has soared over more than three years, so a pullback could occur, and tech stocks like Meta might decline.
But it's important to keep our eyes on the long-term story. So far, the demand we've seen and the capabilities of AI suggest that this technology may indeed be a revolutionary one. And that means companies that have gotten in early and led the way could score a significant win.
Meta has a sound social media business that allows it to generate revenue, remain profitable, and continue along the AI research and development path. Meanwhile, its new products offer it the ability to start generating some revenue from the AI investment.
At the same time, the stock, trading at 21x forward earnings estimates, looks reasonably priced considering the complete picture. All of this makes Meta a great growth stock to buy on the dip.
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Adria Cimino 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.
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