By Ryan Vlastelica, Bloomberg
Meta Platforms Inc. keeps writing bigger checks in pursuit of its artificial intelligence strategy, and traders keep cheering it on, encouraged that the expensive bets will keep paying off.
The stock is back near record territory after soaring more than 40% from its April low. Last week, Meta finalized a $14.3 billion investment in Scale AI, whose leader is joining a team being assembled by Chief Executive Officer Mark Zuckerberg to pursue artificial general intelligence. That came just after Meta raised its capital spending forecast for 2025 to as much as $72 billion.
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Meta’s rally has coincided with a resurgence in trader appetites for AI-related stocks, after the earnings season alleviated fears that Big Tech companies might rein in spending on expensive computing gear. The rebound marks a shift from earlier in the year, when stocks such as Nvidia Corp. tumbled on concerns about AI models developed on the cheap in China.
An exchange traded fund that tracks AI stocks including Amazon.com Inc. is up 32% from a low on April 8, the day before US President Donald Trump paused tariffs on trading partners, sparking a broad relief rally in stocks. Over that period, the Global X Artificial Intelligence & Technology ETF has outperformed the S&P 500 and the tech-heavy Nasdaq 100, which have gained about 20% and 27%, respectively.
Allen Bond, portfolio manager at Jensen Investment Management, bought Meta shares for the first time in recent weeks, in part because of the company’s aggressive spending on AI. He also cited improved operational efficiencies and the shift away from the so-called metaverse, which prompted the company to change its name from Facebook in 2021.
“Using AI to optimize the data it has on users for revenue is a clear application, one that allows Meta to play offense while Alphabet is playing defense,” Bond said, referring to concerns that the Google parent could lose market share in the lucrative search business to AI services like ChatGPT. “While AI is expensive, there is good evidence that it is really paying off so far.”
Meta’s return on invested capital hit a record high of 31% in the first quarter, more than double the levels from 2023 when the company’s metaverse ambitions were driving higher spending.
Meta uses AI to improve ad targeting and increase engagement across its apps, which also include Instagram and WhatsApp. The Wall Street Journal recently reported that Meta is looking to fully automate ad creation, using AI technologies.
Dan Salmon, an analyst at New Street Research, estimated that generative AI creative tools could boost Meta’s annual ad revenue growth by 1% to 2% over the next several years, and as much as 4% by the end of the decade.
Still, long-term tailwinds from AI are widely expected, raising the question of how much further the stock can rally in the near term. Shares trade at 24.5 times estimated earnings, cheaper than other megacaps, but still above its own average over the past decade of about 22 times.
While Wall Street is broadly optimistic — nearly 90% of the analysts tracked by Bloomberg recommend buying — Meta shares are just shy of the average price target, suggesting limited expectations for additional gains.
“It is still in the buy range, since you’re getting pretty strong growth for a pretty reasonable price,” said Greg Halter, director of research at the Carnegie Investment Counsel. “Still, rallies like this don’t continue forever, and it certainly isn’t the screaming buy it was not too long ago.”
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