AI’s Growing Impact on Meta Platforms and Alphabet’s Future

Artificial intelligence (AI) companies vary widely, with major tech giants leading the change. Two notable players, Meta Platforms (NASDAQ: META) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), are integrating AI into their core operations—aiming to reshape their business models around this transformative technology.

These tech behemoths rank among the world’s most valuable companies; however, their growth has not been driven by AI. Instead, they foresee AI as a catalyst for future expansion, positioning themselves as AI-first entities.

Yet, current market valuations reflect skepticism regarding their existing business frameworks. This caution may offer a buying opportunity for long-term investors, as AI has the potential to significantly alter their revenue trajectories in the near future.

Image source: Getty Images.

Advertising: The Revenue Backbone

Both Meta Platforms and Alphabet generate a substantial portion of their revenue from advertising. In the first quarter, approximately 77% of Alphabet’s income stemmed from advertising, whereas Meta Platforms relied on ads for an astounding 98% of its revenue.

When the advertising market is booming, both companies thrive; conversely, during a downturn, challenges arise. Advertising expenses are often the first to be reduced during economic slowdowns. This fluctuation in demand can depress ad prices, negatively impacting Alphabet and Meta’s revenues.

Forecasts suggest a struggling economy, which contributes to the lower valuations of these stocks compared to their tech peers.

GOOGL PE Ratio (Forward) data by YCharts

Currently, the S&P 500 (SNPINDEX: ^GSPC) trades at 21.1 times forward earnings, making Alphabet notably cheaper than the broader market, and Meta only marginally more expensive. These metrics indicate potential buying opportunities, especially given the anticipated impact of AI on their businesses.

AI’s Vital Role in Future Growth

Although Alphabet was somewhat late to adopt AI, its Gemini model is now among the leading systems. Management reports that its AI Overviews search summary tool, prominently featured atop Google searches, has gained substantial traction.

Moreover, Alphabet’s Google Cloud provides essential tools for AI model development, particularly with its advanced hardware like custom Tensor Processing Units (TPUs) and state-of-the-art GPUs. This focus on cloud computing reflects in its impressive 28% revenue growth in Q1.

Meta Platforms has identified five key areas poised for AI-driven enhancements:

1. Improved advertising
2. More engaging experiences
3. Business messaging
4. Meta AI
5. AI devices

The most critical area for Meta is improved advertising, given that it forms the bulk of its revenue. AI is vital for audience targeting, offering potential benefits for both advertisers and the company. Additionally, successful AI devices from Meta, like its smart glasses, could unlock new revenue streams beyond current estimates.

While the market only recognizes Alphabet and Meta for their existing advertising businesses, AI has the potential for significant growth. Now may be an opportune time to invest in these stocks. Historically, advertising markets tend to recover, and new AI-driven revenue possibilities could emerge, making these companies more robust in three to five years.

Is It Time to Invest in Meta Platforms?

Before buying shares in Meta Platforms, it’s prudent to evaluate this:

The analyst team has identified ten top stocks recommended for investors today, and Meta Platforms is not included. The selected stocks have strong potential to deliver substantial returns in the years ahead.

For context, if one invested $1,000 in Netflix when it made the recommendation list in December 2004, it would be valued at $623,103 today. Similarly, an investment in Nvidia in April 2005 would be worth $717,471 now.

The total average return for the advisory is 909%, significantly outperforming the S&P 500’s 162% return.

Suzanne Frey, an executive at Alphabet, serves on The Motley Fool’s board. Randi Zuckerberg, a former Facebook executive and sister to Meta CEO Mark Zuckerberg, is also on the board. Keithen Drury holds positions in Alphabet and Meta Platforms. The Motley Fool has positions in and recommends both companies, following its disclosure policy.

The views expressed here reflect the author’s opinion and do not necessarily represent those of Nasdaq, Inc.