Meta Platforms (META 2.55%) is one of the most dominant companies on the face of the planet. In about two decades, the business has catapulted to a gargantuan market cap of $1.6 trillion. It successfully rode the wave of rapid smartphone and internet adoption.
Meta can be a polarizing company at times. However, its shares have worked out well, soaring 462% in the past three years (as of Dec. 12), even though they trade 18% below their record from August. Should you buy the dip in this social media stock before 2026?
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AI and network effects run the show
The most important trend impacting Meta these days is artificial intelligence (AI), which has become the top priority for founder and CEO Mark Zuckerberg. Money is no object for Meta. It will spend $71 billion (at the midpoint) on capital expenditures this year, mainly on AI-related infrastructure, a figure that "will be notably larger in 2026."
The company's key revenue driver is digital advertising, bringing in $50 billion in revenue in Q3, up 26% year over year. It makes sense that Meta would leverage AI innovations to bolster this part of the business. It's using AI to improve feed algorithms and personalize content recommendations, supporting higher user engagement. And the company is launching AI features for its advertising to better target these users and boost return on spend.
These efforts look to be working. Meta's ad impressions were up 14%. And price per ad rose 10%. Shareholders like seeing growth in both of these areas.
Critics are right to question if all this spending will eventually lead to adequate financial returns for the business. Only time will tell, but the positive view is that Meta is trying to become a leader in AI. If it didn't invest so much or adjust its strategic focus to AI, then there's a very real possibility it could fall behind. Management wants to minimize that risk.
Besides being at the forefront of the AI boom, another quality about the business that investors will undoubtedly find appealing is the presence of network effects. The user experience gets better over time, with support coming from more people and more content on the platforms, as well as better data and technology.
Meta's social media apps satisfy the fundamental desire for humans to connect with each other. This isn't going away. And the company's dominance, as exemplified by its massive daily active user base of 3.54 billion people, should give investors confidence that Meta won't be disrupted or become obsolete anytime soon.
NASDAQ: META
Key Data Points
Meta shares trade at a compelling valuation
Meta is one of the world's elite businesses. That alone should always keep it on your radar. But valuation is another important piece of the puzzle. Investors should aim to buy companies when there's a margin of safety. This helps reduce the risk of overpaying for a stock.
The situation today is attractive, though. Shares are trading at a compelling valuation. Investors can buy the stock for a price-to-earnings ratio of 28.5. This makes Meta the cheapest of the "Magnificent Seven" group of businesses. Adding the company to your portfolio when the market presents this kind of opportunity looks like a smart money move.
Think about the long term
As the year soon comes to a close, investors are looking at ways to position their portfolios for 2026 and beyond. This can introduce a sense of urgency as you try to figure out what trades to make, buying and selling businesses to maximize the potential for long-term returns. This is certainly a valuable exercise.
However, investors should not rush to make a decision just because 2025 is about to end. Investment moves should be made with an unwavering focus on the long term.
