Meta Platforms Continues to Prove Why It's a Premier Play on AI

Key Points

• Meta Platforms released Q4 2024 financials that were solid from top to bottom.
• New technologies are improving the company's advertising capabilities and delivering value to customers.
• The stock continues to be a strong play on AI through its Family of Apps segment.

Meta Platforms NASDAQ: META continues to be one of the top-performing AI stocks. As of the Feb. 6 close, the shares have appreciated by 22%. That’s by far the best performance of any of the Magnificent Seven stocks. After the company’s recent earnings report, the stock has received many upgrades from Wall Street analysts. Since the release, 22 Wall Street analysts MarketBeat tracks have issued new price targets on the stock. Of them, 21 upgraded their targets; the other left it unchanged.

Overall, the average of their new price targets implies an upside in the stock of 7%. That might not sound like much, but it's notable, considering that the company is among the most upgraded stocks on the market. This means that recently, once Meta reaches its price target, it will be upgraded again. This isn’t surprising, given the company’s strong earnings results. Below, I’ll break down the recent results from Meta. I’ll also highlight how the company continues adding value to its advertising business. Lastly, I’ll explain why there is still a lot of reason to be bullish on this big tech name.

Meta: Strong Topline, Bottomline, and Underlying Results

In the final quarter of 2024, Meta’s revenues continued to grow strongly, up by 21%. In addition, its operating margin increased by 700 basis points from Q3 2023 and 500 basis points from just one quarter ago. Overall, the company’s diluted earnings per share (EPS) increased by 50%. Sales topped estimates by 3%, while EPS came in 19% above expectations.

Merchants continue to recognize the value of advertising on Meta’s Family of Apps. Its average price paid per ad increased by 14%, a massive acceleration in growth compared to just 2% in Q4 2023. The company’s use of AI to push personalized advertisements on its platforms clearly resonates with ad purchasers. But how exactly is the company getting advertisers to pay more and more on its platform?

Understanding How Meta Drives Value: Examining Andromeda and Advantage+ Creative

One reason that the company is seeing continued pricing power and volume for its advertisements is its new machine learning system, Andromeda. Built-in partnership with NVIDIA NASDAQ: NVDA, the system “enabled a 1,000x increase in the complexity of model we use for ads retrieval."

The company’s advertising model essentially works as a top-down filter. It generates many possible advertisements that could be shown to someone at the top and then filters them out to only show someone the best ads for them. Higher model complexity means more ads at the top of the filter. Overall, it should lead to more advertisements that people are likely to interact with and purchase products.

This makes advertising on Meta’s apps more valuable, meaning advertisers are willing to pay more for the service. Meta notes that Andromeda improved its ad recall rates by 6%. This means the model is leaving out fewer relevant ads. The NVIDIA Grace Hopper Superchip powers Andromeda, which is why it is investing billions in these chips. The earnings call revealed that most of its $60-$65 billion in capital spending will focus on its “core business,” which is advertising.

Investments in AI infrastructure are driving returns on investment for advertising customers. Meta reports that new users of its Advantage+ Creative platform saw a 22% rise in return on advertising spend. This platform uses AI to enhance ad appearance. This is the value customers are paying for when advertising on Meta.

What’s Next for Meta?

Meta has many vectors through which it can continue to grow its business. Given the demonstrated success the company has shown in using AI in its advertising business, I believe its revenue per ad can continue to expand meaningfully. The company also is continually rolling out new features to increase engagement in its apps.

The monetization of Instagram Reels and the Threads app are further opportunities to fuel advertising revenue growth. This may not start to add meaningful value in 2025, but Meta is meant for long-term investment. Long-term monetization can also come from its Llama model and Meta AI. Additionally, the company’s Reality Labs segment, which makes virtual reality hardware, lost nearly $18 billion in 2024. Eventually, turning this around would be a big boon to the stock. Although this is a very long-term play on the future of virtual reality, it adds further upside to the stock.