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Meta is one of the cheapest big tech stocks, and that earns it a new ‘buy’ call
Last Updated: Sept. 10, 2024 at 10:41 a.m. ET
First Published: Sept. 10, 2024 at 9:03 a.m. ET
By
Ciara Linnane
Meta is poised to be an open-source leader for the next two major tech platforms, say analysts
Meta Platforms Inc. has earned a spot as a top pick in the mega-cap space thanks to leadership in two major technology platforms and an attractive valuation, D.A. Davidson said Tuesday, as it initiated coverage of the stock with a buy rating.
Analysts Gil Luria and Alex Platt assigned the stock a $600 price target, about 19% above its current price.
The Facebook parent META is positioned to be Open Source leader for AI Foundation Compute and Spatial Compute, the analysts wrote. AI Foundation Compute refers to the infrastructure, models and frameworks needed for large-scale AI applications, while Spatial Compute integrates AR, VR and immersive environments.
“Unlike the nimble innovations of past tech cycles that favored startups, these platforms require enormous computational power, data,
and long-term vision—factors that favor mega-cap firms with the resources and strategic foresight to commit to such undertakings,” they wrote. “In this context, the distinction between open platforms and closed-garden approaches will become a key competitive dynamic.”
Alphabet Inc. GOOGL , Apple Inc. AAPL , Amazon.com Inc. AMZN and Microsoft Corp. MSFT are all taking a closed-garden approach to the platforms, leaving Meta with the pole position on the open side.
Meta has chosen to open source elements of AI compute, the analysts wrote, citing as examples Llama, PyTorch and FAISS, or Facebook AI Similarity Search (Faiss), a library that allows a user to quickly search for multimedia documents that are similar to each other.
PyTorch is a framework for building deep learning models, while Llama is a family of large language models released by Meta AI starting in 2023.
“It helps that Meta’s core product actually benefits from AI,” the analysts wrote.
While Google still needs to manage the shift to AI-enhanced search, Meta is already reporting how advancements in AI are driving improvements in ad delivery and yields, said the analysts.
“This makes it easier to justify not only the investments in AI compute, but also open sourcing them to capture the benefits from the developer community,” they wrote.
In spatial computing, D.A. Davidson is expecting the tens of billions that Meta has poured into Reality Labs, the renamed Oculus VR, to become the moat that positions the company to be open source winner alongside Apple’s closed garden.
Reality Labs is the Meta unit that produces virtual reality and augmented reality hardware and software.
“While Apple’s companion for the PC era was Microsoft and Apple’s companion for the mobile era was Google Android, we believe neither Microsoft nor Alphabet are as focused enough on this next large platform,” the analysts wrote.
Meta is also benefiting from the fact that it’s very much managed in “founder mode,” the analysts said, referring to the recent Silicon Valley discussion that compares companies run by their founders with those run by professional managers. Meta exemplifies those benefits more than any other mega-cap, they wrote.
Co-Founder and Chief Executive Mark Zuckerberg “has navigated numerous existential challenges successfully,” and appears to be focused on the next two large opportunities, said the analysts. They noted Zuckerberg’s “deliberate transformation as a leader” to adapt to Meta’s goals.
The $600 price target is based on 24 times 2025 EPS. The current valuation at 21 times makes Meta aside from Google, the least expensive mega-cap, even before factoring in the option to sever Reality Labs losses, which would take the multiple down to 16 times.
“With this in mind, as we move towards the large future platforms, we will be monitoring short term challenges such as tougher comps, reliance on Chinese shlock-hawkers and the upcoming election cycle,” said the analysts.
Meta’s stock was down 0.3% Tuesday, but has gained 42% in the year to date, while the S&P 500 SPX has gained 14.7%.
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