Meta Platforms shares have been trading at an unusually low price, but this bargain-bin price may be a warning sign for investors rather than an opportunity. The company's stock has been languishing due to concerns over its spending on AI, leaving it with a low price-to-earnings multiple.
Despite its fast-growing revenue, which rose 33% in the first quarter, Meta's underlying business is uncertain. The company's reliance on AI to show users ads is growing, but user growth is not impressive, with a 4% year-over-year increase in the first quarter.
Meta executives believe their AI-infused ad strategy will continue to drive revenue growth, but without better user growth, the company may reach a natural limit to what AI can do for its ad business. Additionally, Meta lacks a cloud-computing business or e-commerce operation to fall back on if its ad business reaches its limits.
The company's spending on AI model development is also a concern, especially since it remains behind rivals. Meta's stock plunged after an earnings report last week that included a $10 billion boost to planned capital spending, and the company is piling on debt to keep that spending going.
Investors are running out of patience with Meta's large spending and limited prospect for returns, and the company faces an array of legal challenges that could impact its business and user growth.
