The recent price drop presents a unique opportunity for investors to add to this high-flying stock.
When the stock of a great company is trading at a fair price, it's usually worth buying. Even if the stock price has risen significantly over the past few months, waiting for a better price is rarely wasted.
But sometimes you get lucky and the market sells blue-chip stocks out of short-term concerns. Meanwhile, the company's long-term outlook still looks bright. Second chances are rare, so when you get one, you should jump at it.
The market appears to be giving investors a big second chance. meta platform (meta 0.43%) right now. Despite strong first-quarter profits, analysts were concerned about the company's plans to ramp up spending, with a particular focus on potential in artificial intelligence (AI). The stock is now down 17% from just two weeks ago, following a post-earnings selloff.
Here's why investors should buy the stock now.
Why did the market punish Meta stocks?
Meta's first quarter results exceeded expectations. Significant revenue growth and earnings were driven by increased advertising prices and impressions.
What changed was the company's outlook for the second quarter and full year. The midpoint of Meta's second-quarter sales outlook was lower than analysts expected.
But analysts had bigger problems with the planned spending increases. Meta now expects total costs to be between $96 billion and $99 billion, raising the lower end of its guidance from $94 billion. Capital expenditures will be in the range of $35 billion to $40 billion, up from previous guidance of $30 billion to $37 billion.
There are clear reasons why Meta is increasing its spending. The company sees great opportunity in artificial intelligence. However, you need to spend a lot of money to take advantage of it.
Meta is used to spending large sums of money to promote products and services that it believes have great potential to reach 1 billion users and generate huge revenues at some point in the distant future. . CEO Mark Zuckerberg made this point in prepared remarks after the earnings release, saying, “Historically, at this stage of our product strategy, we see a lot of volatility in our stock price.'' We have invested in expanding new products, but we have not yet realized profitability.”
Indeed, the market slammed Meta's stock after it announced investments in mobile feeds, Stories, Reels, and more. But investors who stuck with Meta were rewarded handsomely as Meta stock hit a new all-time high earlier this month. The recent decline in stock prices has given investors new opportunities to initiate or add to positions.
Meta AI ambitions
Zuckerberg believes Meta can become the world's leading AI company. Previous versions of the company's LLaMA large-scale language model have shown promising results, and in certain benchmark tests he outperformed major competitors such as OpenAI's GPT-4 and Anthropic's Claude. Sometimes it happened. His new LLaMA 3 model, released last week, goes even further.
“In fact, I think we're at a point where we can build cutting-edge models and prove that we can be the world's leading AI company,” Zuckerberg told analysts during Meta's first-quarter earnings call. Told. “And that opens up a lot of additional opportunities for us, not just the most obvious ones.”
Meta's AI efforts are a key component of the company's family of apps. AI powers recommended content on Facebook and Instagram, especially his Reels product. Additionally, Meta uses AI to determine which users see which ads, when they see them, and how many ads each user sees. The company recently overhauled its ad ranking system to improve efficiency, and it's proving to be successful. An increase in ad impressions and average ad price is a good sign. Meta is also incorporating generative AI within its ad creation platform, and he says usage of those tools has doubled year over year.
Zuckerberg pointed out several ways to leverage generative AI to build profitable businesses at scale.
- Use AI-powered chatbots to help businesses respond to customers quickly and accurately.
- Advertising or paid content within AI interactions.
- Option to pay for more advanced AI or more computing power.
But that ambition is still years away. “That's the main thing I'm most focused on this year, and probably a lot of next year, is growing that product and other AI products and efforts around those,” Zuckerberg said. .
Great opportunity to buy stocks
Despite increased operating expenses and capital spending, the sell-off appears to be an overreaction. Meta's core performance has been excellent and the outlook for the business remains strong.
At the core of Meta is the advertising business. Also, advertising sales last quarter increased by 27%. Management expects sales to increase 18% at the midpoint of the outlook. Although total expenses may increase slightly than originally expected, investors can still expect his strong double-digit growth in operating income. This, combined with Meta's large share buyback plan, should keep earnings per share rising at a high pace for some time.
After the drop, Meta shares trade at just over 20 times analysts' 2025 earnings estimates. Management's comments about spending to grow the AI business may cause some analysts to lower their earnings estimates, but it's still great value at this price.
Importantly, if Meta's artificial intelligence ambitions play out as Mr. Zuckerberg hopes, it could give Meta new large-scale business, further increasing its stock price potential. That means there is. Second chances don't come around very often, but if you're on the sidelines and watching the stock price go up after the recent sell-off, I'd buy the stock here.
Randi Zuckerberg is a former Facebook market development director and spokesperson, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. Adam Levy holds a meta position on his platform. The Motley Fool owns a position in and recommends Meta Platform. The Motley Fool has a disclosure policy.