"AI monetization leader"! Morgan Stanley praises Meta: large user base, improved profitability methods

According to Zhitong Finance, Brian Nowak, the head of U.S. Internet Research at Morgan Stanley, explained in an interview how Meta Platforms Inc. (META.US) is monetizing its vast user base through artificial intelligence and stated that the company has gone the "farthest" in AI monetization.

Nowak said, "In terms of monetizing generative AI and GPU-supported machine learning, Meta is still one of the earliest companies. They are building better models to analyze all data more effectively. As the amount of data they analyze increases, the time each user spends is also growing. Each user now spends 30 to 40 minutes daily on Facebook, Instagram, and other platforms, and that is still increasing. Most importantly, they are improving the way they make money through more relevant ads, which have higher click-through rates and actually drive more transactions. Therefore, when we consider this early generative AI cycle, Meta is still the company that has gone the farthest in building new models to better analyze its leading first-party data, drive more engagement, and monetize that engagement more effectively."

Despite reporting strong quarterly results, Meta's stock price fell due to rising AI-related expenses, which once again raised investor concerns about return on investment. However, those optimistic about Meta believe that Zuckerberg's continued investment plans in AI are entirely reasonable.

Meta has driven growth in usage and advertising revenue through AI technology by improving algorithms and user experience. Meta also reported that its Llama AI model has been widely adopted, attracting over 500 million monthly active users on its platform. As Meta expands its AI infrastructure, this progress is expected to yield strong profitability over the next two years. Additionally, Meta's advancements in Reels and WhatsApp help manage the growth of capital expenditures as the company strives to remain competitive in the AI space.

Meta has established a clear monetization strategy for its generative AI (especially Llama3), making it a strong competitor against rivals like OpenAI's ChatGPT. With a massive user base of 3.3 billion, Meta offers data and distribution advantages that can capture a significant share of the GenAI market. While short-term investors may be concerned about Meta's increased AI spending, its expected price-to-earnings ratio of 24 times (based on a projected earnings per share of $24.62 for fiscal year 2025) makes it the second most affordable large-cap tech stock among peers (Apple (AAPL.US), Amazon (AMZN.US), Microsoft (MSFT.US)), only behind Google (GOOGL.US).

According to some forecasts, Meta is expected to achieve earnings per share of $25-26 next year, slightly above consensus expectations. Strong U.S. economic performance, lower inflation, favorable online advertising pricing, and AI investments could drive earnings growth. If Meta's valuation aligns with the industry average price-to-earnings ratio of 26.6 times, its stock price could exceed $600 Alger Spectra Fund also pointed out in its Q3 2024 investor letter: "Meta operates the world's largest social network, with over 3 billion monthly active users. More than 95% of the company's revenue comes from advertising, with the North American and international markets sharing the spoils. The Q2 financial report was strong, with revenue and earnings exceeding analyst expectations, contributing to the stock price performance. Management also raised its revenue forecast for fiscal year 2024, citing improvements in ad monetization. CEO Mark Zuckerberg stated that artificial intelligence played a key role in these successes, as the company is leveraging AI to enhance targeting, measurement, ranking, and ad delivery. Higher user engagement, driven by video ranking, content recommendations, and individual video views, also supported growth. Additionally, the optimization of video ad placements and the automation of ad campaigns will further drive profitability."