A Second Chance: 1 Artificial Intelligence (AI) Growth Stock Down 17% to Buy Now

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The recent price rally is a rare opportunity for investors to add to this high-flying stock.

When a great company's stock trades at a reasonable price, it's usually worth buying. It rarely pays to wait for a better price, even if the stock has risen significantly over the past few months.

But sometimes you'll get lucky, and the market will sell off a great stock because of near-term problems. Meanwhile, the long-term outlook for the company still looks promising. Those second chances are rare, so you should pounce on them when you see them.

The market seems to be giving investors a second chance. Meta platforms (Meta 0.43%) now. Despite strong first-quarter earnings, analysts were wary of the company's plans to increase spending, particularly focusing on its prowess in artificial intelligence (AI). Shares are currently trading 17% below where they were just two weeks ago after a steep earnings selloff.

Here's why investors should take the opportunity to buy shares now.

Image source: Getty Images.

Why did the market punish meta stocks?

Meta's first quarter earnings results were better than expected. Strong revenue growth and bottom-line results were bolstered by increased ad costs and impressions.

Where things took a turn was in the company's outlook for the second quarter and the full year. The midpoint of Meta's second-quarter earnings outlook came in below what analysts were expecting.

But analysts had an even bigger problem with the planned increase in spending. Meta now expects total spending to be between $96 billion and $99 billion, raising the lower end of that guidance from $94 billion. Capital expenditures will range from $35 billion to $40 billion, compared to previous guidance of between $30 billion and $37 billion.

There is an obvious reason for Meta to increase its costs. It sees a huge opportunity in artificial intelligence. But it costs a lot to benefit from it.

Meta is no stranger to spending heavily to push products and services that it believes have huge potential to reach 1 billion users and generate massive amounts of revenue sometime in the distant future. CEO Mark Zuckerberg pointed this out during his prepared remarks following the earnings release, saying, “We've historically seen a lot of volatility in our stock during this stage of our product playbook — – where we are investing in scaling a new product but not yet monetizing it.”

To be sure, the market punished Meta's shares after it announced investments in its mobile feed, Stories, Reels, and more. But investors who stuck with Meta have been handsomely rewarded as the stock hit a new all-time high earlier this month. With the recent pullback in shares, investors have a new opportunity to start or add to their positions.

AI ambitions of the meta

Zuckerberg thinks Meta could be the world's leading AI company. Previous versions of the company's LLaMA large language model have shown promising results, occasionally beating leading competitors such as OpenAI's GPT-4 or Anthropic's Claude in some benchmark tests. The new LLaMA 3 model released last week is even more advanced.

“I actually think we're in a place where we've shown we can build leading models and become the world's leading AI company,” Zuckerberg told analysts during Meta's first-quarter earnings call. can.” “And that opens up a lot of additional opportunities that are most obvious to us.”

Meta's AI efforts are key components of its family of apps. AI powers its recommended content across Facebook and Instagram, particularly in its Reels product. Additionally, Meta uses AI to determine which people see which ads, when they see them, and how many ads each person sees. It recently completely overhauled its ad ranking system to improve performance, and it's proven to be successful. An increase in ad impressions and average ad cost is a good indicator there. Metta has also incorporated creative AI into its ad creation platform, and says usage of these tools has doubled year-over-year.

Zuckerberg identified several ways to build profitable businesses at scale on the back of generative AI:

  • Using AI-powered chatbots to help businesses respond to customers faster and more accurately.
  • Advertising or paid content within AI interactions.
  • Pay options to use more advanced AI or more compute power.

But those ambitions are still years away. “I would say that's the most important thing that I'm focusing on this year and probably next year is driving engagement around this product and other AI products,” Zuckerberg said.

Best opportunity to buy shares

Despite rising operating costs and capital expenditures, sales appear to be an overreaction. Meta's core earnings results were stellar, and the outlook for the business remains strong.

At its core, Meta is an advertising business. And ad sales rose 27 percent last quarter. In the middle of its outlook, management expects revenue to grow 18 percent. While total expenses may rise slightly more than originally anticipated, investors can expect strong double-digit growth in operating income. When you combine this with Meta's massive share repurchase plan, earnings per share will continue to grow at a strong pace for the foreseeable future.

After the sale, Meta shares trade at just over 20 times analyst estimates for 2025 earnings. While some analysts may adjust those earnings expectations downward following management's comments about spending to grow the AI ​​business, it's still a great value at this price.

Importantly, if Meta's ambitions in artificial intelligence pan out as Zuckerberg expects, he could have another big business on his hands, adding to the stock's upside potential. Second-chance opportunities don't come around often, but with the recent selloff in the stock, I'd buy shares here if you're sitting on the sidelines watching the stock rise.

Randy Zuckerberg, former director of market development and spokeswoman for Facebook and sister of MetaPlatforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Levy has positions in the Meta Platforms. The Motley Fool has positions and recommends meta platforms. The Motley Fool has a Disclosure Policy.

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