Meta's huge AI investment is expected to boost returns and ease investor spending concerns

Published Thu, Jun 20 20243:10 PM EDT

Artificial intelligence-driven momentum in Meta Platforms' advertising business is boosting Wall Street's confidence that the company's massive investment in AI will deliver substantial revenue over time. KeyBanc on Wednesday increased its Meta price target to $540 per share from $475 — citing a "meaningful uptick in Meta ad prices" quarter to date. The analysts attribute the strength to the Facebook and Instagram company's growing success using AI to boost ad engagement and relevance as well as advertisers' return on investment (ROI). If this trend were to play out as KeyBanc describes, it would ease investor worries that Meta is spending too much on AI without seeing enough of a return, and give us more confidence as shareholders that Meta is appropriately allocating its money. "If they can show that these spendings are driving a return being through engagement, higher returns for advertisers leading to higher ad prices, that would be a good thing," Investing Club Director of Portfolio Analysis Jeff Marks said during Thursday's Morning Meeting for members. META YTD mountain Meta stock performance year-to-date. Riding the tech and AI trade, Meta shares closed at a record high of $527 each on April 5. The stock pulled back some going into the company's first-quarter results after the bell on April 24. The next day shares sank 10.5% on weak revenue guidance and an increased capital expenditure outlook. On the post-earnings call, management said it will continue to "invest aggressively to support our AI research and product development efforts." This dynamic raised concerns Meta may not be making as much money from AI as competitors such as Alphabet . Like Meta, the Google parent is using AI to enhance its consumer platforms and the potential for more advertising dollars . However, Alphabet is also charging $20 per month for its AI assistant Gemini Advanced. The subscription comes with two terabytes of storage and the ability to use the tool across Google's productivity apps such as Gmail. Google also has a major cloud business and can benefit from the enterprise side of AI as well. While the new Meta AI generative artificial intelligence assistant is currently free to use, the company has been using AI to improve how its social media apps work, which makes ads perform better. Reels uses AI to suggest interesting content to users, which keeps them watching longer. This increased engagement helps brands better reach their audience. Meta believes its commitment to investing in AI will create more value for advertisers and is expected to be a long-term growth catalyst for the company. KeyBanc sees "potential for upside on AI investments flipping to monetization earlier than we envision," despite expenses trending higher, which could pressure on earnings and Meta's price-to-earnings multiple. "We are already seeing initial returns in engagement trends and monetization, suggesting that this capex cycle is worth supporting," the analysts argued. They also point to Meta's strong free cash flow generation as a key component to raising revenue estimates. Following the steep decline in Meta shares after earnings, we upgraded the stock to our buy-equivalent 1 rating . We weren't concerned about the short-term drop, thinking rather it could lead to a potential buying opportunity. We did, however, reduce our price target to $525 from $550 on outlook worries. While roughly flat since the quarterly report, shares have gained more than 40% year to date after nearly tripling last year. (Jim Cramer's Charitable Trust is long META, GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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