Meta Platforms: A Smart Pick Before Potential Stock Split

When a company announces a stock split, it often follows a significant rise in its stock price. Although a split doesn’t alter the company’s fundamentals, it usually signals that management is optimistic about future growth. Consequently, investors often flock to these stocks to make the most of the momentum.

However, the most advantageous time to buy shares may be prior to the split announcement. For example, one leading artificial intelligence (AI) company has seen its share price skyrocket 557% since it hit an intra-day low two years ago. Despite the recent high prices, there remains significant potential for further growth.

Expanding Investment in AI

AI technology has long been important to Meta Platforms, from determining what shows up in your Facebook or Instagram feed to assisting marketers with ad campaigns. In the last two years, the company has substantially increased its investments in various AI initiatives.

A significant factor driving this increase is Reels, Meta’s competitor to TikTok. Engagement with Reels depends heavily on an AI algorithm that curates interesting content. Meta has enhanced its recommendation engine to provide users with more relevant and engaging content, applying similar technology to other content formats across its platforms, like Feeds and Stories.

Interestingly, broader recommendation algorithms outperform more specialized ones. This improvement contributed to a 10% rise in total ad impressions in the second quarter, with Meta also increasing the average price per ad by 10%.

Furthermore, Meta is advancing AI applications for advertisers. The company can currently suggest audience targeting criteria, but CEO Mark Zuckerberg envisions a future where AI will autonomously create ad campaigns based on specific budgets and goals. Meta already offers AI-driven features through its Advantage+ tools for shopping and app install ads.

Perhaps the most visible effect of AI integration is the rollout of Meta AI across its messaging services. Equating to OpenAI’s ChatGPT, Meta AI aims to become the most popular AI assistant by the end of 2024. As of late August, it had 185 million weekly users, closely rivaling ChatGPT’s 200 million.

However, these advancements come at a high cost. Meta allocated $28 billion for capital expenditures in 2023, with expectations to increase this to $37 billion to $40 billion this year. Zuckerberg anticipates that costs for training and operating AI will rise further in the coming year.

Strategic Long-Term Planning

Meta’s capacity to invest heavily in AI research offers a significant competitive advantage. Few companies can match Meta’s spending, placing it in a privileged position to drive innovation. In a recent earnings call, Zuckerberg stated, “We are in the fortunate position where the strong results we’re seeing in our core products and business gives us the opportunity to make deep investments for the future.”

This long-term vision has historically benefitted Meta. Notably, the company made its Llama foundation models open-source, a move that enhances its appeal to developers despite forgoing immediate revenue. Allowing widespread development can accelerate the pace of innovation and potentially lower costs in the long run.

By fostering a robust development ecosystem, Meta hopes to enhance software efficiency, support scalable hardware, and develop a diverse set of tools for AI model applications. These initiatives align with Zuckerberg’s goal of positioning Meta as the leading AI company globally.

Will a Stock Split be in the Cards for 2025?

As Meta’s share price approaches $600, the company seems ripe for a stock split. More notably, the stock appears to trade at a fair valuation, providing management with the confidence needed to consider a split while maintaining positive growth prospects.

Currently, shares trade at less than 24 times analysts’ earnings estimates for 2025, making it an attractive option compared to other AI stocks. Additionally, Meta’s management views it favorably, repurchasing billions in stock each quarter. In the last quarter, Meta bought back $6.3 billion worth of its shares and retains over $60 billion under its current buyback plan.

While increased capital expenditures in recent years may pressure earnings due to higher depreciation, Meta’s free cash flow is expected to remain strong.

Whether or not the company announces a stock split, it presents a compelling opportunity for investors at its current price.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.