Following ChatGPT’s astronomic rise in popularity, igniting a hot rally in some leading artificial intelligence (AI) stocks, technology sector giants are joining the generative AI race. Recent news from a Mark Zuckerberg post on Facebook is that social media giant Meta Platforms (NASDAQ:META), is integrating group efforts to focus on building generative AI. This could be big news for META stock investors as the company adds a new angle to its investment thesis. Nonetheless, I am neutral on Meta Platforms, as it’s too early to know how AI will play out for the company.
After posting its first-ever revenue decline in February (by 1% year-over-year) and a 38% drop in operating earnings during the past year, Meta Platforms needed to be pragmatic in improving operating efficiency in the face of a potential recession. A high-growth investment thesis no longer holds much weight on META stock.
Still, generative AI has created a buzz in the capital markets, and valuation multiples on successful generative AI stocks could expand as the revolutionary technology changes the modern-day workplace and renders some age-old professions at risk of abrupt extinction.
Meta Platforms to Focus on ChatGPT-Type AI
Meta Platforms’ CEO Mark Zuckerberg announced on Monday, February 27, 2023, that the company will create a new “top-level product group…focused on generative AI” to “turbocharge” the tech giant’s work in the emerging AI area.
The company will assemble an AI development team from across its subsidiaries into one group to focus on building “creative and expressive tools” and later on develop AI “personas” that should be helpful to its social media platforms’ users with image, video, and multimodal experiences.
Generative AI is an offshoot of machine learning products popularized by OpenAI’s ChatGPT platform, taking the internet world by storm.
Generative AI Could Boost Meta’s Stock Price
A successful design of generative AI products that enhance consumer engagement for Meta’s apps may increase advertising effectiveness and boost revenues and earnings growth for the business once again, which could boost Meta’s stock price.
In an earnings conference call in February, Mark Zuckerberg dubbed 2023 “the year of efficiency.” Following a massive staff lay-off in December 2022, Meta is streamlining its organizational structure, and the latest announcement fits nicely into the company’s evolving expense-management strategy.
A focused approach to developing generative AI products and tools could achieve two objectives at Meta. Firstly, generative AI could improve internal productivity and cost efficiency as engineers “delegate” some tasks to the new technology. The company could also create new, hot generative AI products that may boost its advertising platforms’ attractiveness, functionality, and user engagement.
Most noteworthy, during the last quarter, the company’s AI efforts saw advertisers realize 20% more conversions than they did in the prior year, reduce cost per customer acquisition, and report higher returns on advertising expenditure. Thus, a successful AI development thrust could significantly enhance the appeal of the advertising space giant’s platforms to its intended advertiser market.
Is META Stock a Buy, According to Analysts?
Wall Street analyst rate META stock a “Moderate Buy” based on 35 Buys, six Hold, and three Sell ratings assigned in the past three months. META stock is up nearly 50% year-to-date, and the average META price target is $215.20, implying 16.4% upside potential over the next 12 months.
That said, I remain skeptical about whether the company’s shares should enjoy expanded valuation multiples due to unproven generative AI intentions just yet.
Conclusion: It’s Too Early to Call AI Glory
As the world’s leading tech firms and new start-ups jostle for leading positions in the AI race, it’s highly likely that generative AI may soon become a “must-have” common feature for Big Tech. However, proven use cases must show an edge in revenue and earnings generation for any “premiums” to stick around for longer.
Most noteworthy, innovations in AI don’t necessarily lower operating costs at Meta in the near term. The algorithms are expensive to run. “A lot of the stuff is expensive, right, to kind of generate an image or a video or a chat interaction,” Zuckerberg conceded during the company’s most recent earnings call.
Investors may wish to wait for execution before betting on Meta’s ground-breaking success in a generative AI world. Meta Platforms was already an AI stock of interest after it released its Make-A-Video product based on generative AI back in September 2022. Make-A-Video can generate high-quality short video content based on text prompts. However, it’s yet to create waves. Therefore, new products may take time to rise above ChatGPT’s noise.
