Meta Platforms (META 1.69%) shared several fun new features backed by generative artificial intelligence (AI) at its Meta Connect conference at the end of September: stickers generated from text, chatbots with personalities, and new ways to make your Instagram photos pop.
But it saved the game-changing reveal for a week later. Meta's generative AI tools for ads are ready for prime time.
These tools can adjust images and text within ads, test different variations, and find the right fit for every advertisement. They represent a major step forward for Meta in producing a return on its massive AI spending, and it could unlock a lot of value for investors.
Here's why it's such a big deal.
Meta is pushing its ad prices higher
Meta's ad prices are determined by how much value an advertisement on one of its platforms can generate for a business. Its new advertising tools have the potential to generate more conversions for marketers while saving them time and money in their creation and management. That means businesses should be willing to pay more for the ads themselves.
Meta said half of all advertisers it surveyed in early testing said they expect to save five or more hours every week using its AI tools. That's a huge time savings, and it represents a lot of potential value for advertisers. A contractor working with multiple clients could be able to increase their load by 15%. Or a business paying a staff of creatives might be able to move employees and resources to a new project as a result of these new AI tools.
On top of that, Meta said advertisers agreed that its AI tools will "help marketers drive campaign performance." In other words, conversion rates for ads should increase as marketers use these tools. Ads that convert better are worth more, and ads that are worth more ultimately command higher prices from the market.
NASDAQ: META
Key Data Points
What's more, AI tools like these lower the bar for businesses to start advertising on Facebook and Instagram. While it's relatively easy for a solopreneur or small-business owner to turn a post into an ad with Meta's tools, getting value out of Meta's ad products requires a certain level of skill. These tools can do a lot of the work for you, bringing you up to par quickly, and helping you get value out of ads.
In other words, Meta has the potential to grow the number of businesses advertising on its platforms. And more competition for ad spots translates into still-higher ad prices for Meta.
Meta's new AI ad tools are creating a lot of value for businesses. And while not all of that value will flow into Meta's income statement, you can bet it's going to see a lot of benefits itself.
Is the stock about to pop?
Meta shares have performed extremely well for investors in 2023, up more than 160%. But there could be a lot more room to run for the stock price.
For starters, shares currently trade around 18 times analysts' consensus estimate for 2024 earnings. That's a significant discount to its biggest competitors as well as smaller social media stocks.
Moreover, Meta is about to start producing a lot of operating leverage, in large part thanks to its AI investments. It has been spending heavily investing in AI without a whole lot to show for it recently. A lot of factors are starting to come together at the same time for the company to produce meaningful revenue growth without a significant increase in operating expenses.
So Meta is positioned to outperform on its bottom line. And if it can execute, it should send the stock much higher, considering its relatively low valuation today.
