Meta Platforms (NASDAQ:META) stock has surged 150% in 2023. But most of the gain isn’t based on reality.
Instead, Meta has gone from being one of the most-hated stocks on Wall Street to one of the most loved, thanks to artificial intelligence.
At the start of 2023, Meta stock was bouncing around the 120s. It opens August 14 at over $300. In the process, its price to earnings ratio tripled, from the low teens to 39.
Analysts now assume Meta’s best days are still to come.
The AI Assumption
AI today is what Internet Commerce was a generation ago. It’s assumed to be huge. It will be huge. But right now, we do not know who the winners will be. Thus, investors pile into the incumbents of the last boom, in this case the Cloud.
During the last decade, Facebook took full advantage of their profits from social networking to build one of the five networks of hyper-scaled cloud data centers that now dominate the world economy.
But does that mean Meta will build the AI world, or just host it?
As I wrote last week, Meta is building its AI platform around open source tools. It’s letting anyone see, use, and improve the code in its AI models.
But the big money in AI won’t come from hosting code or controlling the code platform. It will come from actual applications that generate revenue and improve productivity.
Right now, that money is being made in specialized decision support tools built on existing databases. Vendors are still connecting client databases to language model software.
Companies built on SaaS databases like Palantir (NASDAQ:PLTR), C3.AI (NYSE:AI) and ServiceNow (NYSE:NOW) are delivering results. Most of the others are just spending money.
Waiting for AI
While waiting on results from its AI efforts, Meta’s principal business has been doing great. This has justified analysts’ love. In the second quarter report, revenue was up 11% and profits up 16% from a year ago.
Earnings growth came from Meta’s “Year of Efficiency.” They fired people. Improved ad targeting also helped. So did Instagram, which is now offering ads on Reels, Meta’s version of TikTok.
The launch of Threads, Meta’s answer to X (formerly Twitter) also raised expectations. So did Meta’s prediction that growth will continue in the second half of the year.
Over the last week the stock’s rise has halted, even reversed, thanks to two factors.
First, CEO Mark Zuckerberg refuses to give up on his failed “metaverse” strategy, virtual worlds visible through proprietary headsets. He even expects those losses to “increase meaningfully” next year.
Second is what I just wrote about AI. Some air is coming out of the balloon for natural reasons. We don’t know who the winners will be. Some have made huge gains on speculation, and speculators are taking winnings off the table.
What Happens Next?
Meta’s status as a “Cloud Czar” and the dominance of its services in the developing world are now in Meta stock. At 39 times earnings and 7.4 times revenue, the company is fully valued.
What investors should look for now are stories about corporations adopting Meta’s tools, and about developers building applications with them. This includes Meta itself. If AI can further improve Meta’s ad targeting, or increase engagement, that’s important.
Don’t be distracted by the circus, by stories about Threads or Zuckerberg fighting Tesla (NASDAQ:TSLA) CEO Elon Musk.
Focus instead on Adam Mosseri, who runs the Instagram empire which includes Threads and Reels. If Meta is to realize “alpha” from AI, it’s his team that will deliver it.
As of this writing, Dana Blankenhorn had a LONG position in NOW. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.