Billionaire Mark Zuckerberg Has Transformed Meta into a Generative AI Leader. But Is the Stock a Buy?

Perhaps no company in history has burned more cash on a project than Meta Platforms (META 0.06%). The social media giant has spent tens of billions of dollars on Reality Labs, its business that encompasses Meta's version of the metaverse (which looks like a failure at this point), and its Quest VR headsets (which have struggled to gain traction).

However, Reality Labs is also the home of the tech titan's efforts in artificial intelligence (AI), and there, the billions Meta has invested into Reality Labs finally seem to be paying off.

What Meta is doing in AI

Meta started doing research in AI more than 10 years ago, initially working on facial recognition technology. It later moved on to machine learning, virtual reality, and the metaverse, but it seems to have found a breakthrough with its Llama large language model, which is now up to version 3.2.

When the company launched Llama 3.1 in July, it said it believed it was the "world's largest and most capable openly available foundation model." On the third-quarter earnings call, CEO Mark Zuckerberg said that Llama has quickly become a standard across the industry.

Llama is also the brains behind Meta AI, the company's chatbot that is available across its four social media properties -- Facebook, Instagram, WhatsApp, and Messenger. Meta AI has quietly established itself as a leader in generative AI.

As of the company's third-quarter report, Meta AI had more than 500 million monthly active users, and the company's AI investments are paying off as it reported an 8% increase in time spent on Facebook and a 6% increase in time spent on Instagram. Additionally, more than 1 million advertisers used its generative AI tools to create more than 15 million ads in October.

Zuckerberg has also said that Meta AI would be the most used AI chatbot by the end of the year, surpassing OpenAI's ChatGPT, Alphabet's Gemini, and other rivals in the process.

Additionally, Meta has teamed up with Ray-Ban to make smart glasses that now have Meta AI built in so you can ask it questions about what you're looking at.

Wearable AI devices have struggled as Quest has never generated significant sales and Apple recently slashed production on its Vision Pro. But the Ray-Ban Meta glasses may be the best product yet in the category as they essentially look like ordinary sunglasses, and carrying the Ray-Ban brand should help them gain adoption.

Is Meta Platforms a buy?

There's still a lot of uncertainty around generative AI, and it's unclear if the billions that big tech companies are spending on the new technology is going to pay off.

However, two things are clear at this point. First, Meta AI has gained a large audience, and having the biggest user base of any AI chatbot is an advantageous position. Second, Meta's advertising business, with the help of its AI infrastructure, continues to deliver strong results. In the third quarter, Meta's advertising revenue jumped 19% to $39.9 billion, making up nearly all of the $40.6 billion it brought in in total revenue.

Meta's advertising business also generates tremendous operating margins as the company finished the third quarter with a 43% operating margin and $17.3 billion in operating income. That includes a $4.4 billion loss from Reality Labs in the quarter.

In other words, Meta Platforms is still growing rapidly and delivering huge profit margins. The stock is also well priced at a price-to-earnings ratio of 27, trading at essentially the same valuation as the S&P 500 index, even though it's growing much faster.

With a strong growth rate, a good price, and a leading AI chatbot, Meta Platforms stock continues to look like an attractive buy.