Since the explosion of ChatGPT in late 2022, artificial intelligence (AI) has become a hot investment trend. It’s hard to overstate the opportunity, but that doesn’t stop analysts from trying. In a recent analysis by PwC, the consulting firm predicts that global economic activity will increase by an additional $15.7 trillion by 2030.
Big Wall Street investors predict that AI will permeate every corner of the global economy. Thanks to quarterly disclosures required by the Securities and Exchange Commission, the rest of us can see which AI-related businesses billionaire fund managers are betting on.
Jeff Yass, one of Wall Street’s hottest billionaires, made a name for himself decades ago as an options trader. Recently, Susquehanna International, a fund he manages, has also been buying and selling common stocks in AI-related businesses.
During the third quarter, Mr. Yass and Mr. Susquehanna sold their stake in Nvidia, the largest supplier of slippers and shovels in the AI gold rush. Susquehanna reduced its stake in Nvidia by 30%, or approximately $722 million. The company also employs complex options trading strategies, so selling common stock doesn’t tell the whole story. But on the surface, it appears that Yas has dumped Nvidia for another AI-focused giant, Metaplatform. (meta -4.00%).
Wall Street is bullish on Metaplatform
Susquehanna’s stake in the parent company of Instagram and Facebook rose 54% in the third quarter to $759 million. The company’s sell-side analysts recently raised their price target on MetaPlatform stock to $675 per share and maintained a positive rating. At recent prices, the target implies an upside of 22%.
Meta Platforms engineers have been using machine learning to power their recommendation engines for years. I usually avoid social media because these endless recommendations are very unpleasant. Fortunately for meta investors, most people are not easily irritated. Approximately 3.2 billion people use at least one Meta application every day.
In 2023, ChatGPT became the fastest consumer application to reach 100 million users. Like much of Silicon Valley, Meta Platform was shocked by the huge demand for generative AI applications, but quickly adapted. MetaAI already has more than 500 million monthly active users, according to CEO Mark Zuckerberg. In October, more than 1 million advertisers created more than 15 million ads using Meta’s generative AI tools.
Improving engagement and ad creation isn’t the end goal of Meta Platforms’ AI ambitions. Zuckerberg intends to make the company a major player in the AI space beyond a family of apps. To this end, we are training Llama, an open-source large-scale language model, on a cluster of 100,000 graphics processors more powerful than Nvidia H100 units.
Reasons to be cautious
Before you put your hard-earned money into Metaplatform stock, it’s important to realize that the company is making a big bet on AI, and there’s no guarantee it will pay off.
Meta plans to spend $38 billion to $40 billion in capital expenditures in 2024. The main costs will be the servers, data centers, and network infrastructure needed to power your AI ambitions.
Meta’s investments for the future have increased significantly this year from $28.1 billion in 2023. This year’s additional $10 billion to $12 billion could be just the beginning of Meta’s AI investments. Management expects infrastructure spending growth to accelerate significantly in 2025.
Metaplatforms’ massive AI push isn’t the only venture company currently draining money. Realty Labs’ third-quarter revenue rose to $270 million, but it wasn’t enough to offset expenses. The division posted an operating loss of $4.4 billion for the three months ended Sept. 30.
Buy, sell or hold?
The meta investment is huge, but so are the returns. The company posted an impressive free cash flow of $52 billion over the past 12 months.
META Free Cash Flow Data by YCharts
In March, the company announced it would distribute $50 billion in stock buybacks to investors. It also launched a dividend program that forces management to think about returns with every new investment decision.
Meta stock trades at about 26 times forward earnings estimates. This is a historically high multiple for Meta, whose earnings per share have more than tripled over the past five years. I’m not excited about buying meta at recent prices, but there’s still a good chance it will outperform the market over the long term.
Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Cory Renauer has no position in any stocks mentioned. The Motley Fool has a position in and recommends Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.
