Meta Platforms (META 2.11%) is probably one of the most misunderstood companies out there. It is consistently judged by what it does with 5% of its business rather than how the other 95% is performing. This misunderstanding was on full display after Meta reported fantastic Q3 earnings, only for the stock to drop right after the report.
Because Meta Platforms is heavily investing in the artificial intelligence (AI) space, some investors are panicking. However, I think that's the wrong way to look at it. Instead, I'm assessing the company to see if it's an AI leader, as a leadership position could be worth billions of dollars.
Meta's Llama AI model is growing in popularity
First, let's talk about what Meta does better than anyone else. Its core business -- social media sites like Facebook and Instagram -- is a cash cow. It thrives off of advertising revenue, which was up 19% year over year in Q3. Of the $40.6 billion in revenue that Meta generated, $39.9 billion came from advertising on its social media sites.
Clearly, this is the main part of the business investors should be focusing on, yet it's easy to get distracted by Meta's side hustles.
NASDAQ: META
Key Data Points
Investors don't have the best experiences with Meta's side hustles. Meta spent billions of dollars building out its vision for the metaverse, only for nothing to come to fruition in that space. Now, it's pouring a ton of money into its AI models. But Meta's generative AI model, Llama, has actually been quite successful.
Llama has seen adoption as the building block of internal AI models for AT&T, Goldman Sachs, and Shopify. From January 2024 to July, Llama usage grew tenfold, which demonstrates rapid adoption.
Meta is looking to capitalize on this usage by developing the next generation of the model. Currently, Llama is in its 3.2 version state, but Meta is developing Llama 4. The computing power necessary to train Llama 4 versus Llama 3 is expected to be about 10 times as much.
In its quest to produce the best generative AI model, Meta conveyed to investors that they should "expect significant capital expenditures growth in 2025." This concerned many investors as they want Meta to focus on being a cash cow and returning profits to shareholders through dividends and share repurchases.
However, that's shortsighted thinking, and if Meta can develop a leading AI model, it will far outweigh the benefit of a dividend or share repurchase program. The stakes are too big not to have a top-notch generative AI model, and with Meta's near-term success in having clients adopt it, investors shouldn't think of this as the next metaverse. Instead, this could be the next Facebook.
Meta's stock isn't overpriced
After the drop, Meta's stock still isn't terribly cheap, but it's a lot more reasonable than some of its big tech peers.
META PE Ratio (Forward) data by YCharts
At 25 times forward earnings, Meta trades at a premium to the S&P 500, which trades for 23.8 times forward earnings. However, those forward earnings projections are a bit muddy, as investors have little idea what its financials will look like over the next 12 months due to hefty AI spending.
Still, after Meta is done with this AI spending phase, it will likely maintain its place as a social media powerhouse and have a significant client base using its AI model. While I don't know what that business will fully look like from a financial standpoint, I'm confident it will be a more impressive version than the Meta you see today.
As a result, I think Meta is a fantastic stock to buy right now, but investors may have to wait a few years to see what the next version of Meta Platforms looks like.
