Key Takeaways
Meta Platforms (NASDAQ:META) is driving the artificial intelligence revolution, but the stock has declined roughly 13% this year amid a range of concerns, including a multistate federal lawsuit. The company agreed to pay $16.7 billion to settle the case, removing a major overhang for the company and its shareholders.
Here is a look at the company’s fundamentals and my outlook for the shares.
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Most of us are familiar with Meta thanks to its social media leadership — the company owns the world-famous Facebook, Messenger, Instagram, and WhatsApp. About 3.6 billion people use at least one of these every day, attracting advertisers to promote their products and services, creating a multi-billion-dollar business.
Advertising drives Meta’s revenue, and it is booming. In the most recent quarter, ad sales climbed 28% to $60 billion, providing ample cash to invest in another area the company sees as a future growth driver: artificial intelligence.
Meta has rolled out AI features across its apps and offers an AI assistant to users, aiming to keep people engaged longer and encourage advertisers to spend more. The company also uses AI to improve ad targeting, which should further appeal to marketers. Over time, Meta’s AI investments could yield additional products and services.
This is encouraging, but Meta has faced headwinds. Some investors worry the AI revenue opportunity may not justify current spending levels. In the latest quarter alone, capital expenditures exceeded $31 billion, driven by infrastructure investments.
The federal lawsuit also weighed on sentiment, representing uncertainty and a potential threat to revenue growth. The settlement requires Meta and the states to agree on measures to protect children, such as blocking nighttime usage, but does not force Meta to remove features like targeted ads.
A Manageable Settlement
Although Meta faces other unrelated lawsuits, resolving this federal case significantly lowers risk. The $16.7 billion payout is easily manageable for a company that generated $200 billion in revenue last year and boasts a market value of $1.4 trillion.
From a valuation standpoint, Meta’s recent underperformance has left the shares trading at around 18 times forward earnings estimates. That looks inexpensive given the company’s durable social media moat — users rarely switch away from Instagram or WhatsApp because their contacts are unlikely to follow — and its strong advertising franchise. Meta also offers investors a chance to benefit from long-term AI growth as the company steadily grows earnings from its core social media business.
While Meta may not rally immediately, as some investors remain focused on AI spending and wait for proof of revenue translation, I expect the stock to gradually move higher over the coming year and beyond. This makes it an attractive buy at current levels for long-term investors willing to hold as the AI story unfolds.
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.