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A Second-Chance Opportunity: 1 Artificial Intelligence (AI) Growth Stock Down 17% to Buy Now

When a great company’s stock trades for a fair price, it’s usually worth buying. It rarely pays to wait for a better price, even if the stock has gone up significantly over the past few months.

But sometimes you’ll get lucky, and the market will put a great stock on sale due to near-term concerns. Meanwhile, the long-term outlook for the company still looks promising. Those second chances are rare, so you should pounce on them when you see them.

The market appears to be giving investors a great second chance with Meta Platforms (META 0.43%) right now. Despite strong first-quarter earnings, analysts were scared off by the company’s plans to increase spending, particularly focusing on its potential in artificial intelligence (AI). Shares currently trade 17% below where they were just two weeks ago after a steep post-earnings sell-off.

Here’s why investors should take the opportunity to buy shares now.

Why the market punished Meta stock

Meta’s first-quarter earnings results were better than expected. Strong revenue growth and bottom-line results were fueled by growing ad prices and impressions.

Where things took a turn was in the company’s outlook for the second quarter and full year. The midpoint of Meta’s second-quarter revenue outlook came in below what analysts were expecting.

But analysts had an even bigger issue with the planned increase in spending. Meta now expects to generate total expenses between $96 billion and $99 billion, raising the lower end of that guidance from $94 billion. Capital expenditures will range from $35 billion to $40 billion, up from previous guidance of between $30 billion and $37 billion.

There’s a clear reason Meta’s increasing its spending. It sees an enormous opportunity in artificial intelligence. But it has to spend heavily to take advantage of it.

Meta isn’t a stranger to spending heavily to advance products and services it believes have a lot of potential to reach 1 billion users and generate a large amount of revenue at some point in the distant future. CEO Mark Zuckerberg pointed this out during his prepared remarks after the earnings release, noting, “We’ve historically seen a lot of volatility in our stock during this phase of our product playbook — where we’re investing in scaling a new product but aren’t yet monetizing it.”

To be sure, the market punished Meta’s shares after it announced investments in its mobile feed, Stories, Reels, and more. But investors who stuck with Meta have been handsomely rewarded as the stock reached a new all-time high earlier this month. With the recent pullback in shares, investors have a new opportunity to start or add to their positions.

Meta’s AI ambitions

Zuckerberg thinks Meta can be the leading AI company in the world. Previous versions of the company’s LLaMA large language model have shown promising results, occasionally beating leading competitors like OpenAI’s GPT-4 or Anthropic’s Claude in certain benchmark tests. The new LLaMA 3 model released last week is even more advanced.

“I actually think we’re in a place where we’ve shown that we can build leading models and be the leading AI company in the world,” Zuckerberg told analysts during Meta’s first-quarter earnings call. “And that opens up a lot of additional opportunities beyond just ones that are the most obvious ones for us.”

Meta’s AI efforts are key components of its family of apps. AI powers its recommended content in Facebook and Instagram, particularly in its Reels product. Moreover, Meta uses AI to determine which person sees which ads, when they see them, and how many ads each person sees. It recently completely overhauled its ad ranking system to improve efficiency, and that’s proven successful. The increase in ad impressions and average ad price is a good indication there. Meta also incorporates generative AI within its ad creation platform, and says the use of those tools has doubled year over year.

Zuckerberg pointed out several ways to build a massive profitable business on the back of generative AI:

Using AI-powered chatbots to help businesses respond to customers faster and more accurately.Ads or paid content within AI interactions.Options to pay to use more advanced AI or more compute power.

But those ambitions are still years away. “I’d say that’s the main thing that I’m focused on for this year and probably a lot of next year is growing that product and the other AI products and the engagement around them,” Zuckerberg said.

A great opportunity to buy shares

Despite the step-up in operating expenses and capital expenditures, the sell-off appears to be an overreaction. Meta’s core earnings results were fantastic, and the outlook for the business remains strong.

At its core, Meta is an advertising business. And ad sales grew 27% last quarter. At the midpoint of its outlook, management expects revenue to climb 18%. While total expenses might climb a bit higher than originally anticipated, investors can still expect strong double-digit growth in operating income. When you combine that with Meta’s massive share repurchase plan, earnings per share will continue to climb at a strong pace for the foreseeable future.

After the sell-off, Meta shares trade for just over 20 times analysts’ estimates for 2025 earnings. While some analysts may adjust those earnings expectations downward after management’s comments around spending to grow the AI business, it’s still a great value at this price.

Importantly, if Meta’s ambitions in artificial intelligence play out as Zuckerberg expects, it could have another massive business on its hands, adding to the upside potential of the stock. Second-chance opportunities don’t come around often, but with the recent sell-off in the stock, I’d buy shares here if you’ve been sitting on the sidelines watching the stock price go up.

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