Meta Platforms has recently rolled out a variety of artificial intelligence (AI) projects, including more affordable smart glasses, a business-oriented tool, plans for a prediction-markets application, and a significant partnership with Qualcomm to enhance its computing capabilities. However, these initiatives have not resonated well with investors. Currently, Meta's stock is among the poorest performers within the mega-cap sector this year, having declined by over 17%. Among the so-called "Magnificent Seven," only Microsoft has fared worse, with a 26% drop.
According to Wall Street analysts, the disappointment stems from a shift in investor sentiment; they're no longer merely interested in Meta's potential for creating AI innovations but are instead focused on whether these products will deliver enough revenue and profits to justify the company's substantial investments in data centers. Piper Sandler analyst Thomas Champion emphasized the significance of this capital expenditure cycle, which is one of the largest in Meta's history. He referred to this cycle as the "elephant in the room" that investors are currently concerned about. While analysts remain optimistic about Meta's core advertising business, they recognize that aggressive capital expenditures have led to cash flow stagnation.
Concerns were amplified when Meta released its first-quarter results on April 29, where it announced an upward revision of its capital spending forecast for fiscal 2026 to between $125 billion and $145 billion - an increase attributed to rising costs for components needed in data centers. This news caused Meta's stock to plummet by 9%. The following day, Bloomberg revealed that Meta was planning a $25 billion bond issuance to finance its AI endeavors. Champion referred to the increased capex as a "disappointment," overshadowing the company's otherwise strong revenue growth.
Another challenge for Meta, as Jim Cramer notes, is its lack of a high-margin cloud business, a distinct advantage boasted by other industry giants like Alphabet, Microsoft, and Amazon. These cloud operations help justify considerable AI investments. Nevertheless, Meta does maintain a solid advertising revenue stream. Cramer expressed that he might consider reducing his stake in Meta if the stock experiences a significant rise.
Jeff Marks, the Club's director of portfolio analysis, pointed out that until Meta can convincingly demonstrate that its AI investments are translating into meaningful new revenue streams, market apprehension surrounding its spending will persist. Champion concurs, stating that investors are looking for indications that spending is stabilizing rather than escalating and that revenue growth remains essential. He highlighted Meta's impressive capability to grow revenue at more than 20% annually, despite already having around $250 billion in annual sales.
Notably, some of Meta's new AI initiatives show promise. Champion recently noted in a research update that the company’s AI-enhanced business messaging tool aims to automate customer support, provide product suggestions, schedule appointments, and manage transactions across platforms like WhatsApp, Messenger, and Instagram. This emerging market is perceived as "underappreciated" and could surpass $75 billion annually, potentially leading to significant revenue growth for Meta. The growth of business messaging, particularly in developing nations such as India, Vietnam, Indonesia, and Thailand, also presents a lucrative opportunity. Early indicators of adoption are positive, with Business AI conversations rising from 1 million to 10 million weekly in the first quarter.
Analysts at Evercore ISI highlighted yet another prospective revenue avenue through Meta One, a subscription-based AI service offering enhanced features across Meta's applications. The service aims to diversify revenue streams and could provide a modest impact on overall income over time. Meta One is currently in limited testing, with different pricing structures aimed at both individuals and businesses, priced at $7.99 monthly for Meta One Plus and $19.99 for Meta One Premium.
Evercore's confidence in the potential of AI subscriptions is supported by Meta's extensive daily active user base, exceeding 3 billion across its platforms. Even a small percentage of adoption could lead to significant revenue growth, with projections suggesting $5 billion to $10 billion in additional revenue and $3.5 billion to $7 billion in operating profit by 2028 if penetration reaches 2% to 4% over two to three years.
While analysts acknowledge that their forecasts for this new offering might vary due to its nascent stage, they reference Snapchat+ as a successful model, noting that over 5% of Snapchat's 25 million daily users have subscribed. Evercore rates Meta as outperform and has set a target price of $930. Presently, the market's valuation of Meta appears to reflect concerns surrounding its AI expenditures and overlooks prospective future revenue opportunities from its newly announced projects. Champion noted that Meta is currently trading below market averages, even though its revenue growth outpaces that of the broader market. The S&P 500’s forward price-to-earnings ratio stands at approximately 21, while Meta is at 16. Piper Sandler has a buy rating on the company, with a price target of $800.
