Every company in the $1 trillion club is investing heavily in artificial intelligence (AI).
Apple (AAPL +2.13%) touted several AI-powered features in its latest iOS update and new iPhone release. The company pours around $1 billion annually into developing new AI technologies.
Amazon (AMZN +3.50%) is the leading cloud computing platform, and it just unveiled its new Trainium 2 chip design to enable developers to train their large language models while using less computing power. It also announced a new partnership with Nvidia (NVDA +2.06%).
Microsoft (MSFT +0.48%) positioned itself as a top choice for AI developers when it increased its investment in OpenAI earlier this year, garnering a 49% stake in the leading AI developer. Its generative AI-powered Copilot service is seeing great momentum across multiple enterprise applications.
Alphabet (GOOG +3.44%) (GOOGL +3.71%) is developing its own large language model to power its services and provides a cloud computing platform for developers to train and run their own AI applications.
Nvidia is the leading AI chipmaker. Leading-edge developers use its graphics processing units (GPUs) to train their AI models.
It should be no surprise, then, that one of the most promising stocks to join the group with market caps exceeding $1 trillion is also spending heavily to develop artificial intelligence and apply it to its products. In fact, there might not be anyone developing an AI as advanced as Meta Platform's (META +6.50%), and the market may be underappreciating its potential.
Image source: Getty Images.
Pushing generative AI forward
Meta CEO Mark Zuckerberg has practically transformed his company from a social media platform provider to an AI innovator. "AI will be our biggest investment area in 2024 -- both in engineering and compute resources," he told analysts during Meta's third-quarter earnings call. Not only that, he's shifting headcount from other areas, deprioritizing non-AI projects to facilitate the investment in artificial intelligence.
So far, the investments have paid off. The company released its Llama 2 large language model over the summer and made it open source. Developers have taken it and produced results that can compete with the leading private AI models, like OpenAI's GPT-4. That could lead to further advancements in Meta's development of Llama 3, which could come as early as the first half of 2024.
But Meta has a big advantage over many of the existing members of the $1 trillion club. It is its own biggest AI customer.
While Microsoft pushes its Copilot features to its enterprise software customers, Nvidia must convince companies they need its chips, and cloud providers have to win customers for their compute space, Meta doesn't really sell its AI developments.
It's simply making its products better
Meta's machine-learning AI, which it's been working on for over a decade, got a massive investment boost after Meta released Reels on Instagram and Facebook.
The algorithm is increasingly responsible for what you see on Facebook or Instagram. Meta says AI-recommended content increased overall engagement by 7% on Facebook and 6% on Instagram this year. Considering the average American spends over an hour per day across those two platforms, that's a lot of added minutes. It's also responsible for Reels driving incremental time spent on Instagram and now reaching a revenue-neutral impact for Instagram.
Meta also uses generative AI to help businesses craft more effective advertisements on Facebook and Instagram. It can do anything from suggesting better wording to testing hundreds of variations of an ad to find the optimal choice. Generative AI can help marketers eke out that extra level of conversions to make ads more valuable.
But the biggest developments may be yet to come.
NASDAQ: META
Key Data Points
Meta unveiled several new AI features at its Meta Connect conference in September. One of the most promising features was Meta's AI studio for businesses. The feature makes it easy for businesses to create more effective chatbots for WhatsApp and Messenger.
Driving users from Instagram or Facebook to one of Meta's messaging apps is already a $10 billion business, but Zuckerberg thinks messaging could be much bigger. Making it easier for businesses to access the most powerful features of its business messaging services could drive tens of billions more in revenue for the company.
Down the road, it's easy to see Meta incorporating generative AI to make the metaverse more appealing with lifelike avatars and environments. For now, though, it's already using its AI investments to show meaningful revenue growth.
Indeed, Meta's advertising revenue grew 23.5% in the third quarter. That far outpaces Google's 9.5% year-over-year improvement and comes close to Amazon's 25% growth off a much smaller base.
The stock price is really attractive
Despite the stock's strong performance in 2023, investors can still get a deal on Meta's stock. Shares trade for just 22.5 times its earnings estimate for the next 12 months. To put that in perspective, here are the forward PE ratios of everyone else in the $1 trillion club.
| Company | Forward PE |
|---|---|
| Apple | 29.6 |
| Microsoft | 32.8 |
| Amazon | 54.5 |
| Alphabet | 24.1 |
| Nvidia | 37.3 |
| Meta | 22.5 |
Table source: author. Data source: YCharts. PE = price to earnings.
I'm not saying any of the members of the $1 trillion club are overvalued (at least not in this article). But Meta's shares look undervalued by comparison. As a leading innovator in AI that's using its development to drive accelerating revenue growth and higher profits, the stock looks poised to hit the milestone again in the near future. Shares will have to climb about 21% to reach $1 trillion, and that looks well within reach for Meta.
