Meta Platforms, Inc. (META): A Bull Case Theory

We came across a bullish thesis on Meta Platforms, Inc. (META) on Substack by LongYield. In this article, we will summarize the bulls’ thesis on META. Meta Platforms, Inc. (META)'s share was trading at $572.21 as of May 1^st. META’s trailing and forward P/E were 22.37 and 22.78 respectively according to Yahoo Finance.

Meta's Q1 2025 results demonstrate its solid financial performance and strategic positioning as the company accelerates its pivot toward a generative AI-driven future. Revenue surged 16% year-over-year, reaching $42.31 billion, with the Family of Apps (FoA) segment accounting for nearly all of this growth. Within FoA, ad revenue grew 16%, while non-ad revenue rose 34%. Meta’s disciplined cost management helped improve operating income by 27%, to $17.56 billion, and net income jumped 35%, amounting to $16.64 billion or $6.43 per diluted share. This strong performance, alongside an impressive 41% operating margin, reflects the efficiency Meta has achieved in its core business. Despite a 9% rise in expenses, the company delivered $10.33 billion in free cash flow, returning $14.7 billion to shareholders via buybacks and dividends. Meta’s balance sheet remains robust with over $70 billion in cash and marketable securities.

FoA remains Meta’s primary financial engine, showing a 52% operating margin. Ad growth was particularly strong in online commerce, with average ad prices rising by 10%. This was facilitated by Meta’s use of generative AI models like GEM (Generative Ads Recommendation Model), which has enhanced ad efficiency and conversion rates. Engagement across platforms such as Facebook, Instagram, and Threads also increased, driven by AI-powered content recommendations. Meta’s AI infrastructure now supports the company’s five strategic pillars: ads, user engagement, business messaging, AI assistants, and AI devices. WhatsApp is gaining traction as a key commerce platform, with new tools that enable businesses to integrate AI agents in Messenger and Instagram.

Meta’s AI Assistant product, now used by nearly a billion people monthly, is another significant development. The company is pushing toward a vision where users can continuously interact with AI companions, utilizing personalized social data. Meta is investing in wearables, such as its Ray-Ban smart glasses and the VR-focused Reality Labs segment, as part of its longer-term bets. Despite a 6% revenue decline and ongoing losses in this segment, Meta continues to focus on research and development to establish AI wearables as a future computing interface. The launch of Llama 4, Meta's new large language model, highlights the company's ambition to lead in AI infrastructure.

Overall, Meta's high-conviction AI strategy is supported by its profitable advertising engine, which funds these long-term innovations. The robust Q1 results, combined with the accelerating integration of AI across its platforms, suggest considerable upside potential. The company enters Q2 2025 with strong momentum, driven by AI-enhanced advertising, though it faces several challenges that could impact its valuation. One major concern is the EU's Digital Markets Act, which may force Meta Platforms Inc (META) to alter its ad model in Europe, potentially reducing revenue from this key region. Other risks include privacy constraints such as Apple’s App Tracking Transparency and global restrictions on third-party cookies, which complicate ad targeting. Additionally, the shifting global trade landscape, particularly the end of the U.S. "de minimis" import exemption in May 2025, poses a threat to Meta’s ad business, as Asian e-commerce advertisers, including Temu and Shein, reduce their budgets due to expected tariff changes.

Despite these risks, Meta's fundamentals remain strong, and the company is optimistic about its future prospects. The Q2 2025 guidance projects revenue growth of 8.8% to 16.5%, reflecting cautious optimism amidst ongoing uncertainties. Analysts are bullish, citing Meta’s scale, margin expansion, and transformative AI strategy. With a P/E ratio of 21–22x for 2025, below its five-year average, Meta is considered undervalued relative to its growth potential. Price targets from firms like JPMorgan have been raised to $675–$750, based on AI-driven ad improvements and enhanced monetization. The bull case hinges on Meta’s ability to leverage its infrastructure and LLMs to create personalized ad products and new revenue streams, while the bear case focuses on regulatory costs, rising CapEx, and macroeconomic risks. If Meta’s AI-driven ad growth continues and it meets its Q2 guidance, its stock could re-rate to the $700 range, though regulatory or trade challenges could derail its progress.

Meta Platforms, Inc. (META) is on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 262 hedge fund portfolios held META at the end of the fourth quarter which was 235 in the previous quarter. While we acknowledge the risk and potential of META as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than META but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.