Metaplatforms (NASDAQ: META) is probably one of the most misunderstood companies out there. It is consistently judged on what it does with 5% of its operations, rather than on how the other 95% perform. This misunderstanding was on full display after Meta reported fantastic third-quarter earnings, but the stock fell immediately after the report.
As Meta Platforms invests heavily in the artificial intelligence (AI) space, some investors are panicking. However, I think this is the wrong way to look at it. Instead, I rate the company to see if it is an AI leader, since a leadership position can be worth billions of dollars.
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First, let’s look at what Meta does better than anyone else. The company’s core business – social media sites like Facebook and Instagram – is a cash cow. It’s thriving on ad revenue, which rose 19% year-over-year in the third quarter. Of the $40.6 billion in revenue Meta generated, $39.9 billion came from advertising on its social media sites.
Clearly, this is the most important part of the business that investors should be focusing on, but it’s still easy to get distracted by Meta’s side hustle.
Investors have not had the best experiences with Meta’s side issues. Meta spent billions of dollars building out its vision of the metaverse, but nothing came to fruition in that space. Now it’s pouring a lot of money into its AI models. But Meta’s generative AI model, Llama, has actually been quite successful.
Llama has seen adoption as the building block of internal AI models AT&T, Goldman SachsAnd Shopify. From January 2024 to July, llama use increased tenfold, demonstrating rapid adoption.
Meta aims to capitalize on this use by developing the next generation of the model. Currently Llama is at version 3.2, but Meta is developing Llama 4. The computing power required to train Llama 4 versus Llama 3 is expected to be approximately 10 times as much.
In its quest to produce the best generative AI model, Meta made it clear to investors to “expect significant capital expenditure growth through 2025.” This has worried many investors as they want Meta to focus on being a cash cow and returning profits to shareholders through dividends and share buybacks.
However, that’s short-sighted thinking, and if Meta can develop an industry-leading AI model, it will far outweigh the benefits of a dividend or share buyback program. The stakes are too high not to have a top-tier generative AI model, and with Meta’s near-term success in getting customers to adopt it, investors shouldn’t look at this as the next Metaverse. Instead, this could be the next Facebook.
