Is it Too Late to Buy Meta Stock?

SUMMARY

Parkev Tatevosian, CFA, analyzes Meta Platforms' recent stock surge following announcements of new AI revenue streams and aggressive pricing for its Muse Spark 1.1 model. He discusses the company's financial outlook, capital allocation history, and maintains a strong buy conviction for Meta despite recent gains.

MAIN POINTS

• Meta considers renting out its AI computing power to third parties to generate new revenue streams. [1:00]
• Meta unveils Muse Spark 1.1 AI model with significantly lower pricing than competitors Anthropic and OpenAI. [3:01]
• Meta's stock price jumps nearly $100 in two days after the July 9th announcement, reflecting market optimism. [5:00]
• Concerns arise about whether low token pricing could negatively impact Meta's operating profit margins. [8:01]
• Meta demonstrates strong capital allocation with a high return on invested capital relative to its cost of capital. [11:02]
• Despite recent gains, Meta's stock is still considered undervalued with a high conviction buy rating. [14:00]

DETAILED ANALYSIS

Meta Platforms has experienced a notable stock price increase, rising over 15% in the past five days and more than 17% in the last month, largely driven by recent announcements related to its artificial intelligence initiatives. The company is exploring the rental of its AI computing power to third parties, a move reminiscent of strategies employed by Amazon and emerging cloud providers such as Coreweave and Nebius. This initiative aims to monetize excess computing capacity, generate additional revenue, and offset the significant capital expenditures associated with AI development, thereby improving cash flow.

In parallel, Meta introduced its Muse Spark 1.1 AI model with a pricing structure that dramatically undercuts leading competitors. Developers will be charged $1.25 per million input tokens and $4.25 per million output tokens, compared to Anthropic's $5 and $25, respectively. This aggressive pricing is expected to attract price-sensitive developers and broaden the adoption of agentic AI by making previously uneconomical use cases viable.

Following these announcements, Meta's share price surged from approximately $575 to $668 within two days, reflecting strong market optimism.

Financially, Meta reported 33% revenue growth in its most recent quarter, outperforming most peers except Nvidia. Wall Street analysts project 26% growth for 2026, with subsequent years forecasted at 19.5% and 17%. However, there is an expectation that these estimates may be revised upward as the impact of new revenue streams becomes clearer.

Despite these positive developments, there are concerns about the sustainability of Meta's operating profit margin, currently at 41.2%, given the low pricing of its AI offerings and the precedent of losses at competitors like Anthropic and OpenAI. Nevertheless, the company’s strong track record in capital allocation, evidenced by a return on invested capital well above its cost of capital, suggests prudent management. Even after the recent rally, Meta trades at a forward price-to-earnings ratio of 20, which is considered attractive.

The intrinsic value, calculated at $913 per share, remains significantly above the current market price, supporting a continued high conviction buy rating.

LINKS

• YouTube channel membership for exclusive perks and early access.
• Special offer for The Motley Fool Stock Advisor.
• Parkev Tatevosian's book on evaluating publicly traded companies.
• Fiscal.ai investment research tool with viewer discount.
• Webull sign-up for bonus shares and commission-free investing.
• Free monthly newsletter via Substack.

KEYWORDS