Meta Platforms shares look like a stock-market steal. But their bargain-bin price is more of a warning about its uncertain prospects than an opportunity for investors.
Meta Platforms CEO Mark Zuckerberg
Meta’s stock has languished recently as concern grows over its spending on AI, leaving it unusually cheap. The company is trading near its lowest price-to-earnings multiple in three years. At around 18 times forward earnings, its valuation also represents a discount to other big tech companies. The premium for Google-parent Alphabet’s shares against Meta’s is the highest it has been since 2022.
That attractive price does come with an underlying business that’s growing fast. Revenue rose 33% in the first quarter—an eye-popping figure for a company as large as Meta.
Meta has arguably been the most successful big tech company so far at using AI to juice ad sales, which account for nearly all its revenue. It is using AI to show users posts and videos that lead them to watch and click on ads more frequently. AI is also helping it improve conversions—getting users to take actions like buying stuff they see ads about. The conversion rate following clicks on ads increased 6% in the first quarter, the company said. Ad prices are also up. All this is giving Meta big momentum at a time when tech companies are more pressed than ever to show a return on big AI investments.
But there are reasons to doubt whether Meta’s AI party will last.
Looming large in the longer term is user growth. The company has a huge base of users—more than 3.5 billion people used Meta’s Facebook, Instagram, WhatsApp and Messenger daily in the first quarter. Growth, though, isn’t impressive: Users rose 4% year-over-year in the quarter but declined sequentially, something that had never happened since it began reporting its active-user metric in 2019.
Meta executives believe their AI-infused ad strategy gives them plenty of runway to grow revenue further. Without better user growth, though, it is only a matter of time before Meta reaches a natural limit to what AI can do for the ad business it relies on.
And Meta, unlike its big-tech peers, has little to fall back on if that ad business reaches its limits. Meta doesn’t have a cloud-computing business like Amazon, Microsoft or Google that could provide another way to generate returns from AI or drive sales during a soft patch for ads. It doesn’t have Amazon’s e-commerce operation or Microsoft’s corporate-software franchise, either.
Meta has made a small but fast-growing business out of its AI-infused smartglasses; but despite the company’s grand ambitions for them, there is little prospect of those glasses replacing people’s smartphones or sending revenue skyrocketing soon. CEO Mark Zuckerberg’s other non-ad ventures, including a video-calling device and virtual-reality headsets, have largely been flops.
Given the narrowness of Meta’s business and its spotty track record broadening it, there is valid worry about its spending on the AI model development race, especially since it remains behind rivals. Meta released a new AI model called Muse Spark last month that puts it in closer competition with Google, Anthropic and OpenAI—at enormous cost and following numerous shake-ups in its AI strategy.
Investors are running out of patience with the large spending and limited prospect for returns. Meta’s stock plunged after an earnings report last week that included a $10 billion boost to planned capital spending to around $135 billion this year.
And the company is piling on debt to keep that spending going, weakening its balance sheet. Meta had more than $57 billion of long-term debt at the end of the first quarter, up from around $10 billion around the time the AI craze kicked off at the end of 2022. That total doesn’t even include a $25 billion bond Meta sold last week, or an off-balance-sheet vehicle it is using to build a $27 billion data center in Louisiana.
The spending growth looks increasingly unsustainable, even with Meta’s revenue growing strongly. The rise in Meta’s estimated cash costs this year—the amount of money going out the door for AI and other expenses—significantly outstrips its forecast revenue growth, according to an analysis from New Street Research’s Pierre Ferragu. As he put it in a recent report: “Meta spends more than it can afford.”
As it tries to make its way in the AI race, Meta also faces an array of legal challenges that are harder to quantify but could impact its business and user growth. Australia in December banned kids under 16 from using social media, and recent court losses in the U.S. in cases involving social-media addiction and harm to children are likely to fuel further lawsuits.
Markets can be fickle. But there are good reasons to doubt Meta’s prospects—even if its shares look historically cheap.
