When management announces a stock split, it usually comes after a long run-up in the company's stock price. And while a split doesn't change any of the underlying fundamentals of a business, it's a strong signal from management that they believe the stock will continue to appreciate over time. It's no surprise then that investors flock to stock-split stocks to capitalize on the momentum and the signal management's sending.
But even better than buying shares after management announces a stock split is buying shares before the announcement. Since reaching an intra-day low about two years ago, the share price of one of the leading artificial intelligence (AI) companies in the world has climbed 557%. And despite shares soaring to new all-time highs this year, there's still a lot of potential left in the business.
That's why investors should consider buying shares of Meta Platforms (META +0.76%).
Image source: Getty Images.
Betting big on artificial intelligence
AI has always been a big part of Meta's business, from figuring out the most relevant item to show next in your Facebook or Instagram Feed to helping marketers build and target their ad campaigns. Over the last two years, though, Meta has significantly increased its investment in various forms of AI across its business.
One big reason for the step-up in investment was the introduction of Reels, Meta's TikTok competitor. Reels engagement is heavily reliant on an AI algorithm recommending great content. Meta has not only developed a better content recommendation engine that surfaces more relevant and engaging Reels for users, but it's applied the same general algorithm to more and more content across its various surfaces (Feeds, Stories, etc.).
It's found that more general recommendation engines, instead of very specific ones, actually perform better. That's reflected in total ad impressions increasing 10% in the second quarter while Meta also increased its average price per ad by 10%.
NASDAQ: META
Key Data Points
Meta's also working on AI for advertisers. It's currently able to suggest targeting criteria for marketers, but CEO Mark Zuckerberg eventually sees AI handling all the heavy lifting of developing an ad creative, testing variations, and building an entire campaign based on a set budget and objective. It already offers some AI-powered features through its Advantage+ tools for shopping and app install ads.
Perhaps the most noticeable impact of AI on the user experience is the rollout of Meta AI in Meta's various messaging services. Meta AI is an AI assistant similar to OpenAI's ChatGPT. Zuckerberg has a goal of making it the most-used AI assistant by the end of 2024. As of the end of August it had 185 million weekly users, almost as many as ChatGPT's 200 million.
None of this comes cheap. Meta spent $28 billion on capital expenditures in 2023, and management expects to spend $37 billion to $40 billion this year. Zuckerberg expects that the costs of training and running AI will continue to climb next year as well.
Meta's thinking long-term
Meta's ability to spend so heavily on AI research gives it a huge advantage over the competition going forward. Only a handful of companies can afford to spend as much as Meta on AI, and few, if any of them, actually spend more. "We are in the fortunate position where the strong results we're seeing in our core products and business gives us the opportunity to make deep investments for the future," Zuckerberg said during Meta's second-quarter earnings call.
That focus on the long-term has worked out well for Meta in the past, and it gives Meta a unique advantage in the current environment. Meta notably made its Llama foundation models open-source for developers. While it foregoes revenue opportunities, it becomes much more attractive from a cost and development standpoint for anyone looking to build an AI-powered application.
For Meta, it could grow the development ecosystem much more quickly than if it charged for licenses. Over the long run, a robust development ecosystem results in more efficient software, the ability to scale efficient hardware supporting the model, and a broader toolset for working with the model to create new applications. That could mean lower costs and faster development for Meta in the long run.
All of this is in support of Zuckerberg's vision for becoming the leading AI company in the world.
Will it split its stock in 2025?
With a share price approaching $600, Meta's stock is certainly priced high enough to justify a split. More importantly, the stock currently trades for a fair price for investors, which should give management the confidence that it can split its stock and keep climbing in the future.
Shares currently trade for less than 24 times analysts' 2025 earnings estimates. That's an absolute bargain compared to other AI stocks. Equally as important, Meta's management also thinks it's a bargain, as it's repurchasing billions of dollars worth of the stock each quarter. Last quarter, it bought back $6.3 billion worth of shares, and it still has more than $60 billion left under its current repurchase authorization.
It's worth noting that the increase in capital expenditures over the last few years will weigh on earnings going forward as more depreciation expenses reach the income statement. However, Meta's free cash flow growth should remain extremely strong.
Whether or not Meta announces a stock split, it looks like a great opportunity for investors at the current price.
