Many investors are worried that the artificial intelligence (AI) sector is in a bubble. Whether or not there is merit to these fears, if you're concerned about the prospect of a bursting bubble but still want to invest in the trend, one approach would be to buy AI stocks that appear relatively undervalued. One great company that fits that description is Meta Platforms (META +7.58%). Its stock has lagged the market over the past six months, but it remains a top pick for buy-and-hold investors.
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Meta Platforms' strong core business
Meta Platforms owns some of the most popular social media services, including Facebook, Instagram, Threads, and WhatsApp. Its ecosystem attracts about 3.5 billion daily active users. Unsurprisingly, its apps are popular among advertisers, and not just because of the sheer size of the company's user base. The volume of activity and engagement on the tech leader's platforms gives it access to plenty of data that helps enhance companies' ability to target potential customers.
The ability to track everything from the posts people like, the videos they watch, the celebrities they follow, and the discussions they engage in grants Meta Platforms a rich set of data to use toward that end. Further, the company has in recent years improved its ad platform through AI-powered algorithms that boost user engagement. More time spent on Meta Platforms' social media sites means higher ad demand, which in turn means more revenue and earnings, all other things being equal. Meta's AI offerings for marketers have also helped advertisers simplify their ad launches. These initiatives are having a meaningful impact on its financial results.
NASDAQ: META
Key Data Points
Why the stock is still a buy
The market, though, has become worried about the massive sums that Meta is spending to fund its AI ambitions. If the returns on those hundreds of billions of dollars in spending don't pan out as the company hopes, its margins and profits will be squeezed. It's a reasonable fear. However, it's worth noting that Meta Platforms seems to be trading at a more reasonable valuation than its fellow "Magnificent Seven" tech giants. Its forward price-to-earnings ratio is the lowest in this group (by a solid margin), even though its revenue growth and earnings growth have been competitive in recent quarters.
META PE Ratio (Forward) data by YCharts.
Could the company's ambitious AI plans fail to deliver results in line with management's expectations? Sure. But even if that happens, my view is that Meta Platforms could quickly cut its costs, pivot its strategy, and recover. That's precisely what it did after its expensive metaverse efforts failed to gain traction. The company altered its strategy and turned toward AI -- so far, successfully so. Meta Platforms' deep ecosystem and network effects -- which should help it retain most of its users -- position it for a host of new monetization opportunities. And that's a great reason to buy the stock -- especially at its current levels -- and hold it forever.
