After a fivefold surge higher since late 2022, Meta Platforms (NASDAQ:META), you may think that less stunning gains lie ahead for shares. After all, Meta Platforms stock currently trades at a forward multiple of 24.3.
That’s in line with its valuation during the pandemic-era tech bull market. The market is also well-aware how the Facebook and Instagram parent is successfully capitalizing on the generative artificial intelligence trend.
With this, you may also be concerned that the market is overconfident about Meta’s future fiscal results, setting the stage for disappointment down the road. However, I wouldn’t jump to the conclusion that META is “priced for perfection.”
Although not a value stock anymore, META has plenty more room for multiple expansion. As you may expect, this is due to the company’s AI catalyst.
META Stock: Still More to Prove, and That’s a Good Thing
During 2023, Meta Platforms disproved the skeptics. By focusing on cost efficiencies, and pivoting focus from the metaverse to gen AI, the company was successful in boosting profitability, as well as boosting the market’s view on the stock.
So far this year, these trends have continued. A prime example was the company’s most recent earnings release in February. As you may recall, Meta Platforms stock soared post-earnings, after the reporting of better-than-expected results and guidance.
Investors have become even more confident in Meta Platforms’ ability to use gen AI technology to improve monetization of its social media properties. That said, Meta Platforms still has more to prove, and that’s a good thing.
Although this company has made major progress commercializing this technology, it has only scratched the surface. Meta is investing billions into the continuing build out of its AI infrastructure.
The end result may go beyond only continued high levels of growth for the company’s existing operations in the years ahead. The company could also make significant progress in one particular area.
Said progress could not only lead to more enhancements of fiscal performance, but help to drive a rerating for shares as well.
The Next Big Perception Change
According to Mizuho’s James Lee, the extent in which AI helps Meta to maximize revenue per user could be far greater than anticipated. In his view, AI may help Meta ultimately increase revenue per user on its platforms by 65%.
Lee is likely talking primarily about increases in advertising revenue per user, but monetization of this technology could go beyond that. Right now, 98% of the company’s revenue comes from advertising.
This means a greater level of uncertainty and cyclicality to future results, compared to tech companies like Microsoft (NASDAQ:MSFT), which have a mainly subscription-based revenue model.
This is a big reason why Meta Platforms stock, like shares in Google and YouTube parent Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), despite strong AI catalysts, sport forward valuations in the mid-20s, while Microsoft has a forward multiple in the mid-30s.
Yet what if Meta eventually monetizes its Llama large language model in another way, by using it to power subscription-based gen AI software?
Such a move could really change market perceptions. I’m not saying this would result in META moving to a mid-30s forward price-to-earnings ratio. However, it could drive a moderate rerating that nonetheless moves the needle.
Bottom Line: Buy on Any Near-Term Weakness
Recently, there have been some factors at play that have perhaps provided a temporary boost for META. I’m talking mostly about the latest news regarding TikTok, and its uncertain future for operating in the U.S.
If subsequent developments suggest an outcome very favorable to Meta, a major TikTok competitor, this factor could quickly leave the scene. Uncertainty about valuation and growth could again take hold in the near-term.
However, if this happens, consider it a prime opportunity to “buy the dip” with this AI winner. Underwhelming price performance could persist, so patience will be key.
Even so, over a multiyear time frame, continued growth, plus a rerating due to additional perception changes, could mean another wave of strong gains for Meta Platforms stock.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
