OpenAI burst onto the scene about a year ago with the launch of ChatGPT, introducing the world to the power of generative AI. It's since been seen as the leader in artificial intelligence, garnering a $10 billion investment from Microsoft (MSFT 0.95%).
But with the explosion of generative AI applications, dozens of companies have thrown their hat into the ring with their own AI models to compete with OpenAI. While OpenAI's GPT-4 is seen as the standard bearer, and it recently released an update on that model, one company is making quick progress in the space, even exceeding GPT-4's performance in some applications. And it might not be long before that company fully takes over as the pacesetter in generative AI.
Most importantly, the company beating OpenAI is already using generative AI in practical applications that can boost its revenue and profits. And you can buy its stock today at a reasonable price.
Image source: Getty Images.
A driving force in generative AI innovation
The company pushing generative AI forward, perhaps more than any other business, is Meta Platforms (META 0.72%).
Meta released its Llama 2 large language model over the summer. Unlike most models from big tech companies, Meta's is open source. That means developers can take the core capabilities of Llama 2 and create their own applications with it. (Meta imposes some restrictions on those applications to prevent misuse and limits applications to 700 million users, so it doesn't meet the strict definition of "open source.")
While developers have taken Llama 2 and made some incredible advancements, Meta's model already offers some big advantages over OpenAI's GPT-4.
In particular, Llama is very good at natural language processing across multiple languages. That makes sense for Meta, which specializes in text-based content from more than 3 billion users around the world with Facebook, WhatsApp, and Messenger. Indeed, one analysis found Llama 2 is as capable as GPT-4 at summarizing text.
Where Llama 2 truly shines, though, is its efficiency. Using generative AI models can be very expensive, and Meta CEO Mark Zuckerberg was keen to point out this challenge earlier this year.
"A lot of the stuff is expensive, right, to kind of generate an image or a video or a chat interaction," he said on Meta's fourth-quarter earnings call in February. "So one of the big interesting challenges here also is going to be how do we scale this and make this work more efficient so that way we can bring it to a much larger user base."
Llama 2 has fewer parameters than GPT-4. While that means it won't be as good at some tasks, it also means it can generate results much more efficiently. For example, the above study found it takes just 1/30th the cost for Llama 2 to summarize text versus GPT-4.
This focus on efficiency means Llama applications can scale without being a cost burden to the company using them. That's extremely important. If the entire point of a generative AI is to save a business money (reducing man hours, replacing some human work), the lower the cost of using the AI model, the more likely a business will use it. And that's where Llama 2 really shines.
What it means for investors
It's one thing to develop a market-leading generative AI model. It's another to turn it into meaningful revenue and profits for investors.
Meta is uniquely positioned to integrate its generative AI capabilities into its own products and services compared to competitors like Microsoft. The company introduced several use cases at its Meta Connect conference at the end of September.
It revealed an AI assistant and dozens of AI-powered chatbots based on celebrity likenesses with their own personalities. That showcases the capabilities of Llama's natural language processing. It also introduced a new image generator that can create stickers for messaging apps or work some magic on your Instagram photos.
One of the most important new products it introduced, though, was the business-facing AI studio. The service makes it easy for businesses to create their own useful chatbots for WhatsApp and Messenger.
The idea was so good, OpenAI released a competing product earlier this month. But Meta has a big advantage that OpenAI and Microsoft don't: WhatsApp and Messenger. Those are apps where businesses are already developing chatbots to work with potential customers.
Meta's messaging apps remain a largely untapped source for revenue growth, and getting more businesses to use them to interact with consumers has been a major focus for management over the last few years. Zuckerberg even said WhatsApp will be the next pillar of growth for the company, well before the metaverse produces meaningful revenue.
Meta benefits from integrating AI with its products and services in several ways.
- It increases user engagement. Chatbots and image generators can be fun and give users more reasons to use messaging apps or post to Facebook or Instagram. It can also facilitate cross-platform engagement. For example, a chatbot prompt, "Show me fun things to do tonight," could send a user to a Facebook event page.
- AI makes it easier for businesses to engage customers. It's giving businesses the tools they need to make it easier to interact with customers via chatbots or answer comments on their posts.
- AI makes it simpler to advertise. Generative AI tools lower the barrier to entry for businesses to start running ad campaigns. It can help optimize copy and images for advertisements and generate hundreds of different options aimed at different target audiences. That can drive meaningful results for a small business, enabling it to compete with bigger companies with larger ad budgets.
To that end, Meta plans to continue investing in AI in 2024. It will be the company's biggest investment area next year, Zuckerberg said, both in terms of engineering and compute resources.
That said, investors should see a continued focus on operating efficiency, which means shifting employees from non-AI projects to work on advancing AI.
And while Meta is at the forefront of a massively transformative industry, its stock still trades at an appealing valuation. It's just over 20 times forward earnings, which is a massive discount compared to Microsoft (30 times) and about in line with the S&P 500. For a company with such strong potential to grow on the back of its AI innovations, Meta shares look like a great opportunity for investors right now.
