AI applications are evolving rapidly. For companies to make money off of the new technology, they need consumers to accept using AI as part of their daily lives. Meta Platforms (META) took a big step toward making AI user friendly this week, making the AI interaction seem like a chat with a popular celebrity, or just another member of your friend group.
Don’t get me wrong, ChatGPT and Claude are great applications, but most people aren’t willing to become “Prompt Engineers” just to find out where the best pizza is near them. To capture the large consumer market, companies like Meta have to dumb down (yes, ironic when speaking of AI) the interface so it’s very simple to use.
Introducing AI bots based on popular media and historic characters to provide both search results, and an AI “buddy” to chat with on Instagram, or via WhatsApp, is a big step in the right direction. As Ahmad Al-Dahle, METAs VP of Generative AI put it, “You don’t have to pull yourself out of context to interact or engage or get the assistant to help you.” It's what the social media and marketing geeks like to call being “native” to the platform.
Meta and Zuckerberg have been chastised in the business press as being behind in the AI game. But with this latest announcement it appears they were just taking some time to get it right…making sure they weren’t just blathering about AI for the sake of getting positive press.
Meta currently has operating margins of almost 29%, and trades at 2.79 times sales. In the latest quarter, revenue increased 11% YoY, and free cash flow was a tick under $11 billion.
The company is rated a B overall in our POWR Ratings, where it is ranked higher than 81% of the stocks in our database. Not surprisingly it rates an A for Quality.
As the AI race developed this year, a lot of investors were asking why only the large companies were “winning” while there seemed to be a dearth of small AI companies. Here’s why. Companies like Alphabet (GOOGL)...which I still call Google…have what it takes to bring profitable AI products to market. Cash…AI is EXPENSIVE. Large data sets…training AI takes a LOT of information. And, always helpful, a built-in user base.
Google, while weaving AI into its products, from Gmail to Google Docs, is also focusing heavily on allowing developers to make new AI products (which inevitably will interact with Google products) by putting a large effort into AI development tools, like its LaMDA, or Language Model for Dialogue Applications.
Thus, a large part of the Alphabet AI strategy is to provide the picks and shovels that build AI. Which, again, it is very good at because it possesses massive databases and the wherewithal to train AI on those databases.
Oh, and as to the user base…as Sundar Pichai, CEO, put it in their most recent earnings release, “With fifteen products that each serve half a billion people, and six that serve over two billion each, we have so many opportunities to deliver on our mission.”
GOOGL has an overall B rating in our POWR Ratings database, performing the best in the components of Quality and Sentiment. The company has a PE ratio just under 28 and has operating margins clocking in at a tad under 26% as of the latest quarter.
Finally, a stock that you may not think of in the same breath as a Meta or Alphabet, but it’s pursuing similar strategies with the massive database it possesses, Yelp (YELP).
As Craig Saldanha, Yelps Chief Product Officer recently wrote, “With the vast amount of rich user-generated content available on Yelp, we’ve long used AI to power solutions across our platform, including dish recommendations, organization of photos and automating content moderation, among others.”
The stock, along with the much larger Meta and Alphabet, has done quite well in 2023, as many smaller companies have missed out on the large cap boom. Yelp has gross margins of over 85%, and trades at 1.68 times sales. It has a 97% overall rating in our POWR ratings and is the number one stock in the Internet category.
Whether making the interface easier and platform native, META, building out tools for AI developers, GOOGL, or making their product and interface better for their customers, YELP, these three stocks are on their respective AI games. They’re bringing AI to the masses and should continue to be rewarded for their work in this area.
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META shares were trading at $305.38 per share on Thursday afternoon, up $7.64 (+2.57%). Year-to-date, META has gained 153.76%, versus a 13.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Steven Adams
After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA.
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