Semiconductor giant Nvidia (NVDA +1.80%) has been on a roll, with shares soaring a mind-boggling 200% last year. Hyperscalers, enterprises, start-ups, and even governments have increasingly focused on adopting accelerated computing solutions to develop advanced artificial intelligence (AI) capabilities.
Not surprisingly, demand for Nvidia's cutting-edge AI chips, networking solutions, and software has soared at an unprecedented pace. Nvidia is a key beneficiary and an enabler of the AI boom. Its full-stack AI platform (hardware, software, and networking solutions) enables clients to rapidly build "AI factories" (essential infrastructure for generating AI-based outputs), which in turn helps expand the AI market.
While all this paints a rosy picture for Nvidia, the company also faces headwinds such as increasing competition, geopolitical tensions, and the risk of self-cannibalization (due to an accelerated pace of rollouts) . On top of all that, the stock trades at over 33 times trailing-12-month sales.
Investors who find Nvidia expensive can consider opting for social media giant Meta Platforms (META +0.64%) as another exceptional way to ride the AI wave, albeit at a relatively lower cost. Here's why Meta Platforms can be a smart pick for astute investors.
NASDAQ: META
Key Data Points
AI leadership
Meta's prowess in building cutting-edge consumer-facing products is unbeatable, and the recently released Meta AI assistant is no exception. Launched in the first quarter, Meta AI is seeing rapid adoption with "tens of millions" of people trying the assistant within a few weeks of launch, according to the company. Meta AI, powered by the Llama 3 language model, is capable of language understanding, image and video generation, creating animations from still images, and overall multi-modal reasoning. Meta expects to make this assistant the most widely used one worldwide.
Meta claims that the Llama 3 model has emerged as "industry-leading" based on several public benchmarks and its ability to understand and generate natural language compared to other state-of-the-art language models. The company has also developed three versions of the Llama 3 model (capable of handling different parameter sizes) for multiple deployment environments and use cases.
The company has already released 8 billion and 70 billion parameter models, (parameters are the variables used for training large AI models) while the 400-plus billion parameter model is still in training. Meta also plans to open-source these models, making them even more robust in the coming years.
Meta has also been aggressively integrating AI in all aspects of its business, whether it's content recommendations to drive user engagement on its social media platforms or a suite of AI tools called Advantage+ to help advertisers optimize and automate advertising campaigns.
Exceptional scale and reach
Meta Platforms' family of apps (Facebook, Instagram, Messenger, WhatsApp) was used daily by nearly 3.2 billion people -- or almost 40% of the global population -- in March 2024. The company's unmatched geographic reach is pivotal in establishing its dominance in the digital advertising landscape. Meta is expected to continue being the second-largest player in the U.S. digital advertising market, accounting for an 18.9% share of U.S. digital ad dollars in 2024.
AI-powered recommendations are helping Meta improve content relevance and user engagement on its social media platforms. In the first quarter, 30% of the posts on the Facebook Feed and more than 50% of the content seen on Instagram was AI-recommended. Reels, a short-form video content format, has also helped boost user engagement, accounting for almost half of the time spent on Instagram in the first quarter. WhatsApp also picked up momentum in the number of daily actives and messages sent, especially in the U.S. market.
The increase in user engagement has translated into improved advertiser performance on Meta's platforms. The total number of ad impressions grew by 20% year over year, while the average price per advertisement was up 6% year over year in the first quarter. Meta's Asia Pacific and "Rest of World" segments have emerged as the fastest-growing ad markets, followed by Europe and North America. Meta has also seen conversions (desired actions such as sales or app installations) grow faster than ad impressions in the first quarter.
Adoption of Advantage+ tools has also risen, considering that the revenue from the "Advantage+ Shopping" and "Advantage+ App Campaigns" products more than doubled year over year in the first quarter.
All these initiatives have played a key role in driving up Meta's revenue and earnings performance. In the first quarter, the company's revenue was up 27% year over year to $36 billion, while operating income soared 91% year over year to $13.8 billion.
Returning value to shareholders
Meta remains committed to returning a major chunk of its earnings to its shareholders. In the first quarter, the company repurchased $14.6 billion worth of shares and paid shareholders $1.3 billion in dividends.
Meta ended the first quarter with $58.1 billion in cash and marketable securities, implying that the company has sufficient resources to continue aggressive investments in AI initiatives while returning capital to shareholders.
Despite these positives, Meta is trading at just under 9 times sales. Although higher than its three-year average price-to-sales multiple of 6.97, it is still quite reasonable for a company expected to grow its revenue by 17.7% in fiscal 2024 and 12.7% in 2025.
Hence, Meta's robust AI strategy, broad scale, commitment to returning capital to shareholders, and reasonable valuation make it a compelling stock to buy now.
