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Sushree Mohanty

Here's Why Meta Platforms Is the Top AI Stock to Watch Right Now

The popular term “Magnificent Seven” was awarded to the seven U.S. tech giants Meta Platforms (META) (formerly Facebook), Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL) (Google's parent company), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA) by Bank of America analyst Michael Hartnett. These seven companies represent pillars of innovation, profitability, and market dominance. And with the rise of artificial intelligence (AI), these seven have raised the stakes in the tech game very high this year.

Within this elite group, Meta Platforms is gaining a lot of traction with its AI-driven efforts and strong third-quarter results. Meta’s stock has gained a massive 177% year-to-date, wildly outperforming the tech-heavy NASDAQ Composite’s ($NASX) 35% gain. Let’s find out if Meta Platforms is the crown jewel of the Magnificent 7.

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Meta Platforms Continues to Impress With Its Efforts

Renowned for its social media empire comprising Facebook, Instagram, WhatsApp, and Messenger, Meta stands at the forefront of digital connectivity, engaging billions of users globally. CEO Mark Zuckerberg had named 2023 as the “year of efficiency,” and the company followed through.

Its third-quarter revenue jumped 23% year-over-year to $34.1 billion, beating consensus estimates by $678 million. Meanwhile, its diluted earnings per share (EPS) increased by an outstanding 168% to $4.39. 

Meta operates in two segments, the first of which is the Family of Apps (FoA), which includes all of its social media platforms. The other is Reality Labs (RL), which offers augmented and virtual reality products and services. Reality Labs has weighed heavily on its financials this year, reporting consistent operating losses - including a $3.7 billion loss in the third quarter.

However, the FoA segment offset those losses with a 24% increase in revenue and an 87% increase in operating profit in the quarter. Meta’s extensive user base provides a lucrative foundation for targeted advertising, a primary revenue stream for the company. Its advertising revenue increased by 23% in the quarter, totaling $33.6 billion.

The Road Ahead for Meta

Meta Platforms’ allure lies not only in its current dominance, but also in its ambitious vision for the future. In its Connect conference in September, the company revealed its latest AI innovations - including Quest 3, AI-powered Ray-Ban smart glasses, its AI Studio platform, and the addition of generative AI stickers to its messaging apps. 

On the third-quarter earnings call, Mark Zuckerberg stated that AI will be Meta's most important investment area in 2024. While management anticipates stronger growth in the coming quarters, the company expressed caution about the outlook, due to ongoing geopolitical conflicts around the world.

CFO Susan Li stated, “Coming into Q4, we've been seeing continued strong advertiser demand in key segments, including online commerce and gaming.” She added, “But having said that, we are also seeing more volatility at the start of the quarter.” 

Li also highlighted that the company witnessed similar trends during the Russia-Ukraine war, which softened demand to some extent, which is why Meta continues to monitor the ongoing situation in the Middle East. As a result, the company expanded its Q4 revenue guidance range to account for the ongoing uncertainty.

On that note, management anticipates Q4 revenue of $36.5 billion to $40 million, representing a 14% to 25% increase. Meanwhile, analysts predict revenue of $38.9 billion and EPS of $4.91 in the fourth quarter.

Despite ongoing investments in AI and the metaverse, Meta boasts a hefty balance sheet, with $61.1 billion in cash and $18.4 billion in long-term debt. It also had $13.6 billion in free cash flow (FCF) at the end of Q3. With growing profits and a positive FCF, Meta should have no trouble paying off debts.

However, management anticipates capital expenditures to rise in 2024, due to increased investments in servers - both AI and non-AI. Meta also expects its Reality Labs operating losses to increase in 2024 amid metaverse product development efforts.

Analysts Expect More Upside From Meta Platforms

For 2024, analysts expect Meta’s revenue to increase by 13% year-over-year to $151 billion. Plus, EPS could jump to $17.29 in 2024, a growth of 21% over 2023. Meta shares are currently trading at about 19 times 2024 projected earnings, which seems reasonable for a growth stock with stellar AI opportunities.

Out of the 38 analysts covering Meta stock, 36 have a “strong buy” recommendation, 1 suggests a “moderate buy,” and 1 suggests a “strong sell.” 

Based on analysts' average price target of $381.11, Wall Street sees a potential upside of about 14% in the next 12 months. 

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The Verdict on Meta Platforms

It might be difficult to award Meta Platform the title of "best of the Magnificent Seven," as each of these stocks is thriving this year as the AI niche expands rapidly. However, Meta Platforms' dominance in social networking, combined with its vision for the metaverse and AI, positions it as the one to watch among the "Magnificent Seven."

On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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