The AI arms race is underway, with companies investing billions of dollars on data centers.

Meta Platforms (META) is shifting its focus from the metaverse to AI, leveraging its massive user base and data to enhance ad targeting and content recommendations. 

The company’s AI investments have already driven impressive revenue growth, despite past skepticism about its monetization strategies. 

This new approach positions Meta as a leader in the AI space, offering promising prospects for investors.

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The AI arms race is underway, with companies investing billions of dollars on data centers and advanced technologies in an effort to revolutionize this developing market.

While most of the market is focusing on companies like Nvidia (NVDA), Microsoft (MSFT), and Google-parent Alphabet (GOOGL) in this race, Facebook-parent company Meta Platforms (META) has emerged as a serious contender.

The company is betting big on AI. This year, it expects to spend between $60 and $65 billion on capital expenditures, well above its $28 billion spent in 2023.

This isn’t the first time Meta has taken a large bet on a growing market. 

Back in 2012, Meta’s original social-media platform Facebook only made money from its web-based platform. It launched its mobile app in 2008, however it wasn’t making the company any money.

Investors doubted Meta’s ability to monetize its apps and feared that it would receive backlash it wouldn’t recover from when it began incorporating ads into its app in 2012.

On top of this, the market punished Meta for its $1 billion move to buy Instagram that year, and its $19 billion purchase of WhatsApp two years later.

However, these moves were a huge success for the company. Meta’s revenue grew from $5 billion in 2012 to $41 billion by 2017 as Meta solidified itself as the largest social media company in the world.

Today investors are doubting the company once again because of its recent investments into the metaverse.

Since 2021, Meta has invested more than $46 billion into the metaverse. The company expected virtual reality to grow during and after the pandemic, when people were forced to interact virtually.

The metaverse didn’t gain much popularity. Uniform return on assets ‘’ROA’’ slipped from 41% in 2021 to 26% in 2023. Meta was forced to put its new investments on the back burner.

Now Meta is taking the lessons learned from its metaverse venture as it invests in AI.

The company’s returns fell in 2022 because it was investing in a project it hadn’t been able to monetize.

Meta’s AI strategy builds on its greatest asset – an unrivaled user ecosystem spanning Instagram, Facebook, Messenger, and WhatsApp.

With nearly 4 billion monthly active users across its platforms, the company possesses an extensive data foundation that few companies can match.

This vast user base provides Meta with unique advantages for AI development and implementation.

The company already utilizes AI to recommend content across its platforms, with AI powering recommendations for approximately 50% of Instagram content and 30% of Facebook content.

From personal experience, many users find Instagram’s recommendation system superior to competitors, delivering more relevant content that drives higher engagement.

As it looks to build out its AI capabilities, the market is worried Meta won’t be able to monetize it either, just like the market feared Meta wouldn’t be able to monetize its social media platforms a decade ago.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform ROA will fall to around 24% instead of improving.

While many companies talk about AI potential, Meta is already showing concrete results from its AI investments.

The company has successfully integrated AI into its core advertising business, improving both content recommendations and ad-targeting models.

This has directly contributed to its impressive financial performance, with a 21% year-over-year sales growth to $48 billion in Q4, driven by 6% growth in ad impressions and 14% growth in average price per ad.

Meta’s AI-powered ad creation tools have seen remarkable adoption, growing from just 1 million to over 4 million advertisers in six months.

These tools allow advertisers to create campaigns more efficiently and cost-effectively, increasing their return on investment while enabling Meta to charge premium prices.

The company reported a 7% increase in conversion rates from ads created using these AI tools.

By investing heavily in AI infrastructure and monetizing its vast user base, Meta is positioning itself as a leader in the next wave of technological innovation.

For investors, the recent stock pullback presents an attractive entry point.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research