Image source: Getty Images
UK investors have been piling into Meta (NASDAQ: META) stock recently. And I get it – the Magnificent 7 stock is down 20% from its highs and is currently trading on a below-market-average price-to-earnings (P/E) ratio of around 20.
I’m just wondering if investors have a full understanding of the backdrop here though? Because there are a few important things to know about this tech company.
Profit uncertainty
The first thing to understand about Meta is that the company is spending tens of billions of dollars on AI infrastructure. This could really slow profit growth in the years ahead.
Currently, analysts expect 20% growth in earnings per share next year. I wouldn’t be surprised to see this forecast come down, however (putting pressure on the share price).
Because when CEO Mark Zuckerberg decides to spend money, he tends to really go for it. Note that recently, he said that he’d “rather risk misspending a couple of hundred billion” dollars on AI than fall behind in the race for artificial superintelligence.
Vulnerable to disruption
Another issue with the huge amount of AI spending is that there’s no guarantee that the investment will pay off in the long run. Now, this could be said for a lot of companies but with Meta there are two specific issues.
First, it doesn’t have a cloud computing unit. Having a cloud unit gives a company the ability to monetise excess computing power by providing services to other businesses.
Second, there’s talk of ChatGPT moving into the social media space. This could be a problem for Meta as users of social media platforms tend to be fickle when it comes to their platforms of choice.
On this second point, I actually think Meta may be the most vulnerable/disruptable company of the Magnificent 7. With the bulk of its revenues coming from social media digital advertising, it’s not nearly as diversified as some of the others.
Smart glasses competition
Of course, Meta has branched out into smart glasses recently. And it has been having success here.
But here’s the thing – tons of companies are developing these. In China, for example, Baidu, Xiaomi, Alibaba, and Huawei all have them.
So, they could end up being commoditised in the long run. Ultimately, I don’t think Meta’s smart glasses are suddenly going to become the new Apple iPhone.
Speaking of Apple, I wouldn’t be surprised to see this company enter the space and capture significant market share. It usually waits for others to release rudimentary versions of tech products and then creates a better version.
It did this with MP3 players and smartphones. And I can see it happening here.
Still worth a look?
Now, I don’t want to sound too bearish on Meta. Because at the end of the day, this company has billions of users on its platforms and it’s already using AI to increase efficiency.
It has also been a terrific wealth generator over the long term. And Mark Zuckerberg has faced plenty of challenges in the past and navigated them successfully.
I just think there’s a chance that the stock may not perform as well as investors believe it will. So it could be worth considering other opportunities in the market right now alongside this stock.
