The S&P 500 index recently reached a historic high, signaling positive momentum in the market. One sector that has been a significant contributor to this momentum is artificial intelligence (AI). The positive outlook on AI technology has carried over into 2024, with the S&P 500 closing at a record level of 4,868.55.
Among the top performers in the market are the Magnificent Seven stocks, which refer to the largest technology enterprises by market capitalization. Currently, five of these stocks have market caps over $1 trillion, including Apple, Microsoft, Alphabet, Amazon, and Nvidia. However, Meta Platforms (NASDAQ: META) with a market cap of $980 billion, has the potential to join this exclusive club and remain there.
In 2023, Meta made a significant bet on virtual reality (VR) and the metaverse but faced challenges as revenue decelerated and expenses rose. To address this, the company refocused on its advertising roots and cost management, leading to a swift recovery. Through the first nine months of 2023, Meta’s total revenue increased by 12% year over year, with free cash flow growing by 140%. This has allowed the company to reinvest profits back into its business.
Meta has interesting opportunities in the AI space. Its Reality Labs business already offers VR hardware devices, which currently contribute only 1% to Meta’s total revenue. Although this division faces R&D and marketing costs, Meta’s smart glasses and augmented reality (AR) developments could drive growth in the VR and AR infrastructure. Additionally, Meta’s generative AI model, Llama 2, has partnerships with notable companies in cybersecurity, workplace automation, and cloud computing, presenting long-term growth potential.
Despite Meta’s stock already experiencing an 8% increase this year, it is trading at a forward price-to-earnings (P/E) ratio of 21.9, similar to the S&P 500. This suggests that investors do not expect Meta to outperform the broader markets. However, the stock appears undervalued, with a price-to-free cash flow of just 26.7. Considering Meta’s ambitions in AI and its discounted historical valuations, now could be an excellent opportunity to invest in the company.
In conclusion, Meta Platforms has shown resilience in the face of challenges and remains poised to benefit from the AI movement. Its advertising and VR businesses are expected to gain from the increasing adoption of AI technology. Meta’s stock appears undervalued, making it an attractive option for investors looking to capitalize on the company’s growth potential in the AI space.
Disclaimer: The Motley Fool Stock Advisor recommends other stocks instead of Meta Platforms. The recommendations aim to provide investors with potential high returns.
