Meta will increasingly be viewed as an AI winner, providing another leg to the bull case, argues this City analyst who thinks the stock is grossly undervalued.
A bullish note on Meta Platforms Inc Class A (NASDAQ:META) is backing generative AI to deliver the next leg of a share price revival that has already doubled the value of the Facebook owner.
UBS this week reiterated its “buy” recommendation and raised its price target from $300 to $335 a share, representing a potential 20% upside on last night’s $278.
It said: “We expect Meta to integrate GenAI broadly into its apps and increasingly be viewed as an AI winner, providing another leg to the bull case.”
The upgrade follows this year’s outperformance by Wall Street technology stocks, fuelled by semiconductor firm NVIDIA Corp (NASDAQ:NVDA) lifting its outlook far above expectations as companies raced to apply GenAI into products, services and business processes.
Nvidia and Meta are among the 10 constituents of the FANG+ index of mega-caps, which has soared by 69% so far this year.
That’s in sharp contrast with 2022, when Meta shed two-thirds of its value on concerns over rising costs, the advertising outlook and competition from other social media platforms.
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The selling took shares back to levels last seen in 2016, but interactive investor customers who made Meta among our five most-bought Wall Street stocks last year have been rewarded with a spectacular turnaround since then.
However, UBS believes there’s more to come after chief executive Mark Zuckerberg announced in February the creation of a new top-level product group meant to "turbocharge" efforts to introduce GenAI experiences across Meta platforms.
Speculation has focused on a new photo-generation feature that will allow Instagram users to modify their photos using text prompts and then share them in Instagram Stories.
However, UBS thinks this is likely the tip of the iceberg in potential GenAI consumer products that can drive more engagement and monetisation.
It said: “There has been chatter of Meta AI tools, but investor conversations have focused narrowly on the ad tech angle, less around consumer applications that could drive new engagement and ad units. We do not think this is priced into shares currently.”
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Meta plans to release GenAI chatbots or “AIAssistants”, with unique skills for users on Instagram, WhatsApp and Facebook.
Snapchat owner Snap Inc Class A (NYSE:SNAP) said recently that more than 150 million users have sent 10 billion messages to the company’s My AI chatbot with conversations about everything from travel and accommodation to skincare, cosmetics and clothing.
UBS believes Meta is better positioned versus Snap to commercialise chatbot signals given a larger and more diverse monthly active user base and stronger ad tech suite.
Its analysis shows that a chatbot would add $7.5 billion if Meta monetises 5% of search queries on the Facebook app alone, fuelling the top line potential long-term.
Trading on 17 times 2024 earnings, the bank notes that Meta is valued well below its historical multiples on an absolute basis and relative to the S&P 500. It adds that an impending move back into the Russell 1000 Growth Index from value will cause growth investors to revisit the story.
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