Meta Platforms’ (META) AI Edge: Will It Overtake OpenAI?

January 2, 2025

Fahad Saleem

6 min read

We recently published a list of Wall Street Is Focusing on These 10 AI Stocks as New Year Begins. In this article, we are going to take a look at where Meta Platforms, Inc. (NASDAQ:META) stands against other stocks Wall Street is focusing on as the new year begins.

Dan Niles, Niles Investment Management founder, recently said in a program on CNBC that a slowdown in spending could be a “big problem” for major AI players in 2025. The analyst highlighted that when Satya Nadella was asked whether his company was facing a chip shortage, the head of the Redmond software giant said his company was facing a power shortage, not a chip shortage. Niles said this goes against the claims of Jensen Huang who has been pointing to unprecedented demand for AI chips.

“If you look at the Magnificent 7 (except one) …. they are trading at a low 30 PE. The S&P 500 is trading at a 25 PE, but if you look at the midcap and small-cap stocks, which people have forgotten about because they’re not really AI plays, they’re trading at around 19 to 20 times. They’ve underperformed up until sort of mid-year when the performance picked up. If you look at stocks since June 30th, basically, the S&P is up about 8%, but the NASDAQ 100 is only up 7%. The Russell 2000 is actually up 10% after being only up 1% for the first six months of the year. So you’re already starting to see this broadening out, and I think with the new administration really focused on domestic manufacturing, deregulation, etc., that’s going to benefit the small midcap names more so than names in the S&P 500,” Niles said.

Niles said stocks can face a “rough” time in the first quarter amid the changing posture of the Fed.

“The Fed finally admitted inflation wasn’t transitory. I think that might have been the wakeup call, which is why I think Q1 could be a really rough time for a lot of the, you know, the market as a whole, but a lot of the mega cap stocks as well. As we have to kind of price in the fact that the FED might, you know, they might pause or they might even raise next year, which I think that’s a 50/50 shot of whether they cut, raise, or hold.”

For this article, we picked 10 AI stocks analysts are talking about heading into 2025. With each company we have mentioned its number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

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Photo by Alexander Shatov on Unsplash

Number of Hedge Fund Investors: 235

During a program on Schwab Network, Tony Zhang from OptionsPlay in December explained why he believes Meta Platforms, Inc. (NASDAQ:META) is a better stock than Apple for investors looking to play the AI and Augmented Reality themes.

“If you actually think about who’s the leader in AI, who’s the leader in what Apple’s really working on for the next phase, which is augmented reality, it’s Meta. Meta Platforms Inc (NASDAQ:META) has a much more compelling story with regards to AI. They have their own AI models. If you look at most of the open-source AI models, they’re based on Meta’s Llama models. If you look at Meta’s name, the whole branding behind it is for augmented reality. Recently, in terms of both hardware and software, Meta Platforms Inc (NASDAQ:META) seems to be leading the space here with regards to Apple. So, I actually think that we have a much more compelling story. If you’re thinking about investing from an AI perspective and augmented reality, Meta Platforms Inc (NASDAQ:META) makes a lot more sense to me than Apple.”

Meta Platforms (NASDAQ:META) is driving usage and ads revenue by improving its algorithms and user experience thanks to AI. Meta also reported strong adoption of its Llama AI model, attracting over 500 million monthly active users across its platforms. This progress positions Meta well for robust profitability in the next two years as it scales its AI infrastructure.

Meta Platforms (NASDAQ:META)’s advancements in Reels and WhatsApp are helping manage CapEx growth as the company strives to stay competitive in AI.

Meta Platforms (NASDAQ:META)’s clear monetization strategy for its generative AI, especially with Llama3, makes it a strong contender against rivals like OpenAI’s ChatGPT. Meta Platforms (NASDAQ:META)’s substantial user base of 3.3 billion provides a data and distribution edge that could capture a significant share of the GenAI market. Although short-term investors may be concerned about Meta Platforms (NASDAQ:META)’s increased AI spending, its forward P/E ratio of 24x, based on FY 2025 EPS estimates of $24.62, makes it the second-most affordable big tech stock, after Google, within its peer group (Apple, Amazon, Microsoft, and Google).

Hardman Johnston Global Equity stated the following regarding Meta Platforms, Inc. (NASDAQ:META) in its Q3 2024 investor letter:

“During the quarter, we initiated one new position in Meta Platforms, Inc. (NASDAQ:META) and had no liquidations. Management at Meta has effectively addressed concerns about investment efficiency by shifting resources from Reality Labs towards broader AI initiatives with a clearer path to profitability. We believe management has successfully articulated the benefits of this strategy, highlighting how AI is driving user engagement and advertiser productivity. This, in turn, fuels continued revenue momentum and increases the likelihood of positive earnings surprises in the future. Additionally, the parent company of the social media platform, Facebook, has recently taken positive steps to enhance safety, which suggests to us a shift towards a more proactive and responsive approach to addressing important potential challenges and concerns. Weak oversight over data privacy protection was a key reason why we sold the position in the portfolio back in 2021. Removing this governance overhang allows us to feel comfortable to enter back into the stock at a time when we believe it is poised for strong earnings growth going forward.”

Overall, META ranks 2nd on our list of stocks Wall Street is focusing on as the new year begins. While we acknowledge the potential of META, our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than META but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

Disclosure: None. This article is originally published at Insider Monkey.

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