Prediction: This Artificial Intelligence (AI) Stock Could Be the Next Nvidia -- and It's Not What You Think

Since OpenAI released ChatGPT to the world on Nov. 30, 2022, shares of semiconductor powerhouse Nvidia (NASDAQ: NVDA) have risen by 818% (as of June 26). To put that another way, over the last two and a half years, Nvidia's market capitalization went from $345 billion to $3.8 trillion. making it the largest company in the world as measured by market cap.

Some investors are already thinking about who the next breakout candidate in the artificial intelligence (AI) revolution will be, with signs pointing to another chip stock -- perhaps Advanced Micro Devices? What about Broadcom or Taiwan Semiconductor Manufacturing? While each of these companies stands to benefit from rising AI infrastructure spend over the next several years, I see another business that is better positioned as "the next Nvidia."

You see, Meta Platforms (NASDAQ: META) has been investing in AI over the last couple of years, and the technologies it's developing could transform Meta's social media empire and position the stock for superior gains over the competition.

Image source: Getty Images.

How can AI transform Meta's ecosystem?

Meta operates across two core segments: advertising and Reality Labs.

Reality Labs represents Meta's metaverse ambitions, which include virtual reality interactions, gaming, and consumer wearables. While Reality Labs stands to benefit from AI, this segment of the company remains unprofitable and is more of a longer-term vision to turn Meta into something beyond just a social media platform.

The main source of revenue and profits for Meta comes from advertising -- specifically, ads that appear across the company's social media platforms: Facebook, Instagram, and WhatsApp. It's this area of the business that is ripe for disruption thanks to the power of AI.

If you have ever scrolled on any of Meta's social media apps, chances are that you've been bombarded with a series of advertisements. However, how many of those ads actually appealed to you?

As sophisticated as Meta's user algorithms have been in the past, my hunch is that you still receive postings or notifications for content, goods, and services that aren't of high interest to you. By leveraging AI, however, Meta can improve its data workloads as it relates to user engagement and consumer behaviors. As a result, the company can improve its predictive analytics to better position more relevant and customized listings for its users.

In turn, advertisers, which can be somewhat unpredictable and exhibit cyclical budgeting strategies, will be more inclined to allocate funds across Meta's various platforms. By keeping advertisers sticky to the ecosystem, Meta has an opportunity to employ pricing power over the competition and accelerate its revenue growth. At the same time, improving ad feeds for its users can also help Meta from a cost structure perspective -- as the unit economics on clicks and customer acquisition should become lower over time.

The combination of accelerating revenue and lower costs could result in meaningful profit margin expansion for Meta in the long run.

What could this mean for Meta's valuation?

Since ChatGPT's release, the share prices of Meta have gained more than 500%. I bring this up to make it clear that Meta has also benefited from the bullish AI trade over the last couple of years.

Data by YCharts.

However, except for a notable spike during the first half of 2023, Meta's price-to-earnings (P/E) multiple has remained fairly consistent over the last 18 months or so.

These dynamics suggest a couple of ideas. First, the relative normalization in Meta's P/E could imply that investors think the company's earnings profile is maturing. In addition, while a P/E of 28 isn't exactly dirt cheap, this valuation is clearly a steep discount based on prior levels.

Meta is positioning itself for a meaningful boost in profitability as AI becomes more integrated throughout its ecosystem. For this reason, Meta's valuation multiples could expand in the coming years as the company's "Nvidia moment" comes into focus. That suggests the company has meaningful upside from current levels.

Is Meta stock a buy right now?

I think Meta is a no-brainer when it comes to megacap AI stocks. The valuation analysis explored above suggests that Meta stock still trades at a reasonable price point despite an already generous return throughout the AI revolution. Moreover, I think the company is still in the early stages of its AI development, and investors have yet to see the full potential these investments could yield for Meta in the long run.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Spatacco has positions in Meta Platforms and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.