Artificial intelligence (AI) is all the rage on Wall Street these days. While there's a good chance AI technology will end up changing many aspects of the world around us, it could be a slower process than some anticipate. Many companies have discussed AI, but far fewer are seeing real-world results.
AI chip superstar Nvidia is the most obvious exception, but is it the best AI stock you can buy today? I don't think so. One stellar AI company isn't getting nearly the same level of spotlight: Meta Platforms (META 0.84%). It may be known more for its social media empire, but CEO Mark Zuckerberg is leaning hard into AI technology, which makes it a long-term wildcard for investors.
Here's why Meta Platforms is by far the best AI stock you can buy today.
Meta is putting its weight into building AI
Today, deep-pocketed technology companies are investing billions of dollars to accumulate the broad computing power needed to develop, train, and use AI models. Meta is one of the companies leading the pack. Zuckerberg disclosed earlier this year that Meta aims to accumulate 350,000 of Nvidia's flagship H100 graphics processing chips by year-end, giving the company a total compute capacity of roughly 600,000 H100 equivalents when factoring in Meta's total chip hoard.
The H100 chip is easily optimized for AI workloads, cementing it as the must-have AI chip in the technology industry at the moment. These chips cost over $40,000 each, giving you an idea of Meta's astronomical investment in AI. Management has guided capital expenditures in 2024 to fall between $35 billion and $40 billion.
Zuckerberg noted AI will become prevalent in Meta's business. Already, the company has developed and integrated its large language model, Llama 3, into its social media apps and deployed AI tools to help advertisers optimize their marketing dollars. AI will continue appearing in Meta's augmented reality business, including the Quest headset line and the Ray-Ban Meta smart glasses.
Supercharging Meta's cash engine
Meta's already a vast and profitable company, and its AI ambitions are icing on the cake. The company hopes AI can enhance its existing business, primarily social media advertising, while opening up new revenue streams.
Meta isn't borrowing money to build out its AI or neglecting other parts of the company. This is a rare breed of business, one that's so profitable it can invest all this cash with little to no short-term return, and still grow free cash flow at the same time.
Data by YCharts.
Such a robust financial backdrop takes much of the risk out of Meta as an AI stock. AI could eventually be a fad (I don't think that's the case), and Meta will still be one of the best businesses you can invest in. Even the mighty Nvidia would be in serious trouble if all these big technology companies stopped buying hundreds of thousands of its AI chips.
The cherry on top
The stock's inexplicably cheap valuation seals the deal for Meta. Calling Meta stock cheap feels off, considering shares have climbed over 80% in just the past year, but a look at the numbers reveals how inexpensive the stock is today.
Analysts believe Meta will earn $20.16 per share this year, which values the stock at a forward price-to-earnings ratio of 24. Analysts believe Meta will grow its earnings over 19% annually for the next three to five years. Remember Meta's Reality Labs segment is currently dragging on profits because it's losing money. Eventually, that segment could come alive.
I use the PEG ratio to evaluate how attractive a stock's valuation is relative to the company's expected growth. Meta's PEG ratio is currently 1.3, a good deal if the business can meet growth estimates.
Now, projections and estimates aren't guaranteed, so investors should consider the odds of Meta coming up short. However, the business is investing tens of billions of dollars with a track record of generating outstanding returns on its capital. Its 10-year average return on invested capital (ROIC) of 21% implies Meta can expect around $1.21 back for each dollar it invests in its business.
That should spell great long-term business results and strong returns for long-term investors.
