AI Stocks Show Promise as Market Conditions Improve
Artificial intelligence (AI) stocks have been a significant factor behind stock market gains over the past two years. Investors have shown strong interest in companies throughout the sector, from AI chip manufacturers to cloud infrastructure developers. This upward momentum paused earlier this year as focus shifted to economic conditions and the potential ramifications of President Donald Trump’s import tariffs.
However, recent developments suggest a more favorable outlook for AI firms. Trump recently reached a deal with China that resulted in tariffs lower than anticipated. This has brought renewed optimism regarding two key points: trade tensions may not lead to recession, and any tariffs on electronics imports are likely to stay manageable.
AI stocks have begun to recover from recent lows, although they remain at compelling price points, signaling an opportune entry moment for investors.
Meta Platforms: Strength in AI and Social Media
While Meta Platforms is widely recognized for its social media brands—such as Facebook, Messenger, WhatsApp, and Instagram—these platforms also serve as major revenue streams. With over 3.4 billion users engaging with these apps daily, advertisers invest heavily, resulting in billions in quarterly revenue for the company.
Beyond social media, Meta is focusing on boosting its AI capabilities, which could enhance its platforms and unlock new revenue sources. The company has developed Llama, a large language model powering its AI offerings like Meta AI, which is currently the most used AI assistant globally. By making Llama open source, Meta invites collaboration for quicker advancements, positioning itself as a leader in AI development.
The company’s solid earnings track record allows for sustained investments, including a proposed $72 billion spend on infrastructure this year, which showcases its long-term commitment to growth.
Microsoft: A Leader in Software and AI Innovation
Microsoft, known for its extensive software ecosystem, has seen impressive earnings that led it to become the world’s most valuable company, with a market capitalization of $3.4 trillion. Its early involvement in the AI sector has given it a competitive edge.
The company integrates AI technologies across its software, enhances performance analytics, and has invested significantly in OpenAI, the creator of ChatGPT. In addition, Microsoft’s cloud services provide AI tools and resources for a variety of customers.
CEO Satya Nadella emphasized this focus on innovation, stating, “From AI infra and platforms to apps, we are innovating across the stack to deliver for our customers.” As of January, Microsoft reported an AI business with an annual revenue run rate exceeding $13 billion, reflecting a remarkable 175% year-over-year increase. With the ongoing AI boom, Microsoft is well-positioned for continued growth.
Meta vs. Microsoft: Investment Considerations
Analysts predict both Meta and Microsoft could see approximately 11% gains in the next 12 months from their values as of May 20. Given their strong market positions, choosing between them is challenging. Both companies are profitable and poised to thrive in the advancing AI landscape.
Looking at valuation can provide some guidance. Although both stocks have rebounded from recent lows, Microsoft has become more expensive since earlier this year, whereas Meta remains more attractively priced.
META PE Ratio (Forward) data by YCharts
If an investment decision had to be made today, I would favor Meta due to its favorable pricing and promising long-term AI outlook.
Investing $1,000 in Meta Platforms: What to Consider
Before investing in Meta Platforms, it’s essential to consider outside perspectives. The Motley Fool analyst team recently highlighted what they believe to be the 10 best stocks for investors to consider, and notably, Meta Platforms was not included. The stocks that made their list could yield substantial returns over time.
For context, consider that if you had invested $1,000 in Netflix when it made this list on December 17, 2004, your investment would have grown to $642,582 today. Similarly, an initial $1,000 investment in Nvidia on April 15, 2005, would now be worth $829,879.
Overall, Motley Fool has reported a total average return of 975%, significantly outperforming the S&P 500, which returned 172%. For the latest insights on their top stocks, you may want to join Stock Advisor.
Randi Zuckerberg, a former director of market development for Facebook and sibling to Meta CEO Mark Zuckerberg, serves on The Motley Fool’s board. Notably, Adria Cimino has no positions in any of the stocks mentioned. The Motley Fool holds positions in Meta Platforms and Microsoft and recommends long options on Microsoft. The Motley Fool adheres to strict disclosure policies.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
