Artificial intelligence (AI) stocks have been some of the hardest hit by the current sell-off in the stock market.
With tariffs potentially increasing the cost of AI infrastructure and increasing fears of a recession, the big bets tech companies are making are set to get more expensive with less potential payoff. That's a recipe for the massive AI spending among these businesses to become a huge drag on profits over the next few quarters. As a result, many of the leading AI stocks have seen their stocks fall well over 25%.
The economic landscape remains uncertain, and policies are changing nearly every day. In times of uncertainty, buying into strong companies with clear competitive advantages has provided excellent returns for investors over the years. One AI leader stands out as a stock to buy, sitting 29% below its all-time high reached earlier this year as of this writing.
Here's why investors should consider adding Meta Platforms (META +0.74%) to their portfolio right now.
Image source: Getty Images.
Meta's artificial intelligence advantage
Meta is one of a handful of "hyperscalers," companies building out massive data centers full of GPUs focused on expanding compute power for AI training and inference. Unlike most other hyperscalers, though, Meta doesn't operate a public cloud platform, where it rents out compute to other companies developing AI-powered applications. That's a significant advantage in the face of uncertainty.
Meta doesn't have to worry about how cloud customers will change their spending habits in the near term. It can focus on its long-term goals and spend on what it needs to make the best possible product going forward. As such, it can ensure high utilization rates for its capital investments.
That's not to say Meta's completely insulated from an economic slowdown. Its main source of revenue is advertising. If consumers are spending less, advertisers will spend less. But it's worth pointing out Meta has historically proven more resilient than other advertising channels in the past.
That's thanks, in large part, to having a much broader audience than anyone else on the internet and its ability to target specific groups of that audience at the right time in the right place. That's incredibly valuable to advertisers looking to make the most of a limited ad budget in a tough economic environment. And investments in AI help improve that over time.
But Meta has a ton of opportunities that its artificial intelligence spending and development can help unlock.
The massive potential of AI for Meta
While Meta's been working on AI algorithms for its newsfeed and other products for well over a decade, it recently started making a significant leap in AI capabilities. With the introduction of Reels, its competitor to TikTok, Meta had to rework its recommendation algorithm. The company found that the more generalized the algorithm, the more engagement from users.
Meta previously ran into a scaling problem as it tried to generalize recommendations. However, using learnings from its large language model development, it's been able to expand the scale of recommendations across Reels, Stories, feed content, and more. As such, it's been able to increase engagement, which means more ad views. But on top of that, it's also been able to increase the relevancy of ads, which means more ad clicks, which means marketers are willing to pay more per ad.
Meta's also incorporated more and more generative AI features into its ad-buying tools. Its Advantage+ campaigns will help optimize ad creatives for specific marketing goals. Four million advertisers were using the feature as of the end of January, and that could scale quickly as the AI improves. AI-optimized ad campaigns could result in more advertisers spending more on ads while spending less on creating the actual ad campaigns.
NASDAQ: META
Key Data Points
But more valuable ads are just the tip of the iceberg for AI's potential at Meta. Meta's also working on its own AI chatbot, Meta AI. The goal is to develop it into a 1 billion-user product. It's already passed 700 million users as of the end of January. Once it reaches scale, Meta could monetize the app through more personalized features.
Meta's using the same foundation to create AI agents for businesses within Messenger and WhatsApp. These agents could help with customer service and sales, allowing businesses to scale quickly and adjust to seasonality without the need to manage a human workforce. AI agents could drive revenue through click-to-message ads on Facebook or Instagram or via increased WhatsApp for Business spending.
Another potential use case for generative AI for Meta is using AI-generated content on its platform. It's already experimented with some content in Instagram and Facebook feeds designed to draw users into its AI chatbot. But quality AI-generated content could ultimately increase engagement and time spent on the apps, giving Meta more advertising opportunities.
Take advantage of the sell-off to buy the stock at a bargain
While Meta faces some risk of an economic slowdown impacting its financials, the risk is mitigated by its position in the advertising market and other growth opportunities. As such, investors have a great opportunity to buy the stock now at an absolute bargain price.
Shares currently trade for a price-to-earnings ratio of less than 22. That's well below its average valuation. That's despite all of the potential growth to come in the future.
Analysts appear concerned about how much AI spending will eat into profits this year. Depreciation expense from previous capital investments will start to eat into operating margin this year as expenses grow faster than revenue. Nonetheless, Meta should produce positive earnings-per-share growth, helped by its massive share repurchase program. The year 2026 should see much stronger results for Meta as it grows into its AI budget.
Investors who can maintain a long-term outlook should see a lot to like about Meta and its position in artificial intelligence. With the stock trading well below its all-time high, now's a great opportunity to buy shares.
