Since OpenAI’s ChatGPT launched the artificial intelligence (AI) era on November 30, 2022, Meta Platforms (NASDAQ:META) has been among the hottest AI stocks not named Nvidia (NASDAQ:NVDA). Shares that were under $100 back then were trading at $472 on May 20. That’s double the gain of one of its main industry competitors, Microsoft (NASDAQ:MSFT).
However, Meta’s revenue gains don’t justify the run-up. Revenue is up only 27% over the last year and net income has only doubled. While those statistics are nothing to scoff at, Meta remains primarily an advertising platform company. Open-source AI projects like LLaMa may be impressive, but they have yet to bring in cash.
LLaMa Hype
The hope is that Meta’s huge investment in AI infrastructure will pay off in global AI leadership. Capital budgets that were laughed at for the failed “metaverse” are now taken seriously because of AI.
Meta has only begun this monetization process, charging to use larger AI models. For the most part, it’s still giving the technology away. It hopes that by making AI a commodity, the scale of its Facebook, Instagram, Threads and WhatsApp apps will bring money back to it.
Gary Marcus thinks this will end in tears just like the metaverse did. He calls large language models overrated, and riddled with mistakes. He believes there has been a “suspension of disbelief” regarding LLMs, that techniques like neuro-symbolic AI will prove superior. (Neuro symbolic AI tries to mimic how your brain works, but “researchers gave up on it too soon,” he writes.)
In other words, LLMs can substitute for the first level of customer service. But when Karen demands to speak to the manager, companies will need a real manager.
If Marcus’ disillusionment becomes anything like conventional wisdom, Meta investors are in for a painful reckoning.
By the Numbers
Meta hasn’t faced a reckoning because it still has tremendous advertising momentum.
Imagine if, 50 years ago, AT&T (NYSE:T) was selling targeted advertising against each one of your phone calls, your letters, and your discussions. That’s what Meta is doing today. Digital advertising has replaced ads set against content with ads set against conversations. Meta dominates because this can deliver very precise targeting, and at lower cost than ads set against paid content.
Meta Platforms is the world’s free communication network. Its 25 data centers and thousands of miles of fiber cable offer easy and cost-free calls and messaging to anyone with an internet connection. It’s also paid for by advertising. That’s because it’s more efficient to find prospects and lead them down a sales funnel if they’re already talking about a certain product or service.
Meta doesn’t pay for its content. It only pays for the infrastructure that passes the content around. Its net margins are 33%, at scale, and those margins are increasing even as its capital costs go up. Through this business model Meta connects people and creates markets, while growing its profits as those markets become digital.
Who said it needs AI?
The Bottom Line
If there is a trough of disillusionment coming for AI, Meta stockholders will be hit as hard as anyone.
Meta’s business won’t be.
Meta’s revenue and profits aren’t dependent on AI. They’re dependent on communication, and advertising that is targeted using that communication. Moreover, a potential failure of AI to change the world could make the kind of communication Meta already enables more important.
If you missed the AI bubble in Meta stock, let it pop. Don’t buy the stock now. (If anything I’d sell it at current prices.) But when you get back in, after the fall, you’ll have a much bigger, more valuable investment than you had before. The Meta story is about what people do with the company’s services, not the software driving them.
As of this writing, Dana Blankenhorn had a LONG position in NVDA and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his free Substack newsletter.