Could Meta Platforms become the biggest beneficiary of AI? $600 is within reach?

Zhitong App has learned that Meta Platforms' stock price fell below $90 in November 2022, reaching a multi-year low. The reason for this is market concerns about the company's ability to withstand the competitive threat from TikTok and the rising interest rate environment. However, Meta Platforms' stock price has rebounded strongly from its low point, with a 194% increase in 2023. This indicates that Meta Platforms has overcome the challenging macro environment while addressing the competition from TikTok.

However, based on the discounted stock valuation, Wall Street seems to be concerned that Meta Platforms' "efficiency year" is a one-time event. In response to this, Julian Lin, an analyst at research service firm Best Of Breed Growth Stocks, pointed out that Meta Platforms' significant investment in Reality Labs will weaken the value of the stock in the short to medium term. However, due to its focus on operational efficiency, even with the inclusion of Reality Labs' losses, the company's profit margin remains strong.

Analysts predict that Meta Platforms will become a key beneficiary of generative artificial intelligence, as it makes its platform's advertising more valuable and easier for advertisers. The analysts added that considering the high-quality business model, net cash balance sheet, and high profitability, the trading price of Meta Platforms' stock is still too low. They reiterated their "buy" rating on the stock with a target price of $600.

1. Key Performance Indicators

Meta Platforms surprised investors with its third-quarter 2023 performance, which was announced at the end of October last year. The financial report showed that Meta Platforms' Q3 revenue increased by 23% YoY to $34.2 billion. Meta Platforms, better than analysts' average expectations, reported revenue of $33.5 billion. Among them, the advertising business, Meta's largest source of revenue, saw a YoY growth of 24% to $33.6 billion, nearly double the growth rate of the first quarter and also surpassing analysts' average expectations of $33 billion.

In terms of profitability, Meta Platforms achieved an EPS of $4.39 in Q3, surpassing analysts' average expectations of $3.63 and far exceeding the $1.64 in the same period last year. In addition, the cost-cutting measures and the flattening of the company's organizational structure implemented in 2022 have boosted Meta Platforms' operating profit margin from 20% in the same period last year to 40%. If we exclude the losses from Reality Labs, the company's operating profit margin in Q3 reaches a high of 51.5%. The "efficiency year" is not just a slogan.

In terms of user numbers, Meta Platforms' family of applications (including Facebook, Instagram, WhatsApp, etc.) saw a 7% increase in daily active users (DAU) in Q3, reaching 3.14 billion, surpassing analysts' average expectations of 3.05 billion. Facebook, the largest social platform under Meta Platforms, reached a new high in daily active users (DAU) in Q3, reaching 2.085 billion.

Meta Platforms also launched a Twitter-like social media platform called Threads, which currently has over 100 million monthly active users (MAU). From a financial perspective, it is still unknown whether Threads will become more important or when, but considering the company's high operating profit margin of 40% in Q3, Threads represents free growth potential.

Looking ahead, Meta Platforms' management expects revenue in the fourth quarter to be between $36.5 billion and $40 billion, a YoY growth of 13.4% to 24%. Meta Platforms' management warned at the performance conference that its advertising business is largely dependent on macroeconomic spending and pointed out that the revenue outlook for 2024 is uncertain. While some media outlets may be disappointed with the guidance range, most investors are likely satisfied with the lower limit of 13.4% guidance.

Investors may be concerned that Meta Platforms' total spending guidance for 2024 will jump from the expected $89 billion in 2023 to between $94 billion and $99 billion. The company's management stated in the conference call that the operating expenses and losses of Reality Labs will increase significantly in 2024. This has raised concerns on Wall Street that the company may deviate from its current trajectory and indefinitely increase spending on Reality Labs with little return.

2. Beneficiary of Generative Artificial Intelligence

At the same time, Meta Platforms may benefit greatly from generative artificial intelligence. The company's management pointed out that their investments in artificial intelligence have paid off, and AI will be their "largest investment area in 2024." The management also expects that AI has helped drive a 7% increase in time spent by users on Facebook and a 6% increase on Instagram through better search recommendations. Wall Street had previously been concerned that Apple's changes in data privacy policies would render Meta Platforms' business model obsolete, but AI seems to have helped address those concerns.

Meta Platforms believes that generative AI can "significantly change advertising," which outlines their vision for new technologies to make ad development easier. Coupled with the company's impressive AI recommendation technology, it is possible to make its suite of applications even more valuable than they are now.

3. Meta Platforms still worth buying Some investors may think that the current stock price of Meta Platforms is too expensive. However, analysts believe that the trading price of the stock is still very reasonable, even after achieving an incredible increase last year. Meta Platforms still has strong potential for further growth due to its low valuation, strong balance sheet with net cash assets, and rapidly improving fundamentals.