In 2023 Meta Platforms (NASDAQ:META) stock has gone from being the cheapest of the Cloud Czars, on a price to earnings basis, to the second most valuable.
Its PE of 38.38 on July 18 was narrowly ahead of Microsoft (NASDAQ:MSFT), which was at 38.18, and well ahead of Apple (NASDAQ:AAPL), at 32.78.
Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) now brings up the rear with a PE of 26. Amazon.com (NASDAQ:AMZN), whose infrastructure investments make it barely profitable, sits atop the pile at 321.
Artificial intelligence hype has powered Meta stock, not earnings. As noted last week, when its PE was 35, Meta’s earnings for 2023 will be 15% below those of last year.
When will the hype stop?
A Closer Look at META Stock
Meta is using an open source strategy to try to overhaul its rivals. As one Indian magazine put it, “Meta needs you in its Generative AI gambit.”
Meta recently published a paper on its strategy. It has also developed a new imaging model called Image Joint Embedding Predictive Architecture (I-JEPA), developed by chief AI scientist Yann LaCun. The training code and model checkpoints are being released open source.
This is in contrast to Microsoft, which put $3 billion into OpenAI, then began lobbying to keep generative AI tools away from the public, calling them dangerous.
Meta’s vice president of global policy, Nick Clegg, insists that the open approach is better for everyone, and that Meta community forums can provide better governance than formal government processes.
Threads Could Be a Dud
Meta also used an open source approach with Threads, a Twitter “clone” being run out of Instagram. Threads is based on the ActivityPub system that also runs Mastodon, an open source competitor.
It’s concern over Threads that may hurt the Meta stock price in the near term. After an initial rush, traffic there is collapsing.
Advocates of ActivityPub are undecided on what to do about it. Each server or “instance” there is autonomous. It can choose to link with or “federate” with Threads or not. As the debate has gone on, it’s clear that many won’t connect, fearful of Meta’s monetization and privacy policies.
Republican politicians are already investigating Threads, fearing censorship. Norway has banned Meta’s ad tracking technology over privacy concerns.
Rising Expectations
Analysts, meanwhile, are raising their price targets, based not just on AI and Threads but on Reels, Meta’s TikTok competitor. They’re expecting fat revenue increases later this year. Price targets are now as as high as $350/share, up $40 from its current price.
What may drive earnings, however, are the recent layoffs stemming from Meta’s disastrous “metaverse” effort and its VR headset. Once those people are gone costs will drop and revenue per employee will rise.
What analysts call Meta’s “robust data ecosystem” remains key to its success. As I’ve written many times, Meta services are the free Internet in most of the developing world. A cheap phone, a wireless contract, and a connection to Facebook or Instagram puts anyone’s talent in touch with global markets.
The Bottom Line
Analysts are looking past second quarter earnings, due July 26, and predicting big things in the third and fourth quarters.
But getting through October with little guidance will leave Meta stock in the eye of a storm. Governments and privacy advocates will all be gunning for the company.
Meta hopes its millions of users, and open source developers, are going to lead it to the promised land of global dominance in the new AI world.
Fasten your seat belts. It’s going to be a bumpy night. Expect volatility ahead. Meta is a kite in a tornado. It could invent electricity, or it could be electrocuted.
As of this writing, Dana Blankenhorn held LONG positions in AAPL, GOOGL, MSFT and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.