Key Points
Meta Platforms' ad business is experiencing significant growth, but its substantial investments in artificial intelligence have raised concerns among investors. On the other hand, Microsoft has shown strong historical performance, yet its stock hasn't consistently maintained a premium valuation.
There are several stocks that may offer better value than Meta Platforms. Finding artificial intelligence (AI) stocks that are priced at bargain levels can be challenging, as most companies in the industry are either fairly valued or trade at a premium. However, there are a few that could justifiably be considered bargains.
Meta Platforms: A Strong Core Business with AI Concerns
Meta Platforms, which operates widely used social media platforms such as Facebook, Threads, Instagram, and WhatsApp, has seen its stock drop by more than 25% from its all-time high established in August. This decline occurred nearly a year ago, and it's worth examining why the stock has fallen so much. While Meta is heavily investing in AI to create new revenue streams, the majority of its revenue still comes from advertising on these platforms.
The ad market has been robust recently, leading to a 33% year-over-year increase in Meta's revenue during Q1. Additionally, Meta has leveraged its AI expertise to improve ad targeting and conversion on its platforms, enhancing their value. However, the market is concerned about the company's massive AI spending. Meta increased its capital expenditure guidance range by $10 billion, raising the midpoint of its range to $135 billion. Despite this, the return on investment from these expenditures remains limited, causing some hesitation among investors.
Despite these concerns, Meta still has a solid core business. At 18 times forward earnings, its stock is cheaper than the broad market S&P 500 index, which trades for 22.2 times forward earnings. The disparity between Meta's rapid growth and its discounted share price makes it appear like a compelling investment opportunity.
Microsoft: A Steady Performer with AI Growth
Microsoft is also down by slightly more than 25% from its peak, but the reasons for its sell-off are less clear compared to Meta's. Microsoft has made strategic moves in the AI sector and is reaping the rewards. Its AI business grew at an impressive 123% year-over-year pace during its last quarter, and its annual run rate crossed $37 billion. Additionally, its cloud computing unit, Azure, grew at a 40% year-over-year rate, contributing to the company's overall 18% growth.
While this growth rate is slower than Meta's, it was one of Microsoft's fastest-growing quarters in a while. Moreover, Microsoft's AI spending has been more measured than Meta's, which adds to its appeal as an investment.
Valuation and Market Perception
Despite its strong performance, Microsoft's stock now trades at 21.3 times expected fiscal 2027 earnings. Measuring it based on fiscal 2027 expectations provides a better forward-looking picture of how the market views the stock. This valuation is also cheaper than the S&P 500, making Microsoft seem like a solid bargain.
Unlike Meta, Microsoft does not face the same uncertainty regarding whether it can effectively monetize an AI business. It is already doing so, which gives it a stronger position in the market.
Should You Buy Stock in Meta Platforms Now?
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Keithen Drury has positions in Meta Platforms and Microsoft. The Motley Fool has positions in and recommends Meta Platforms and Microsoft. The Motley Fool has a disclosure policy.
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