Meta is one of the two best advertising machines ever built and is on track to beat Google in ad revenue, yet its stock has sold off 20% from its peak due to market fear over its massive AI capex spend.

My pick for this time is Meta. When I was looking at the recent shuffle in the market, I see many names falling down and Meta was one of them. Its share price from its peak has fallen down by 20%. And when I looked at the company, the business is pretty strong. They're one of the two best advertising machines ever built. In fact, they are on track to beat Google in terms of ad revenues. They are forecasted ad revenue for 2026 is $243 billion, which will be $3 billion more than Google's. And they're growing, their operating margin is very healthy at 41% with a 46 billion free cash flow in 2025, a 30% net margin. Their revenue has been growing pretty healthily for last five years with a 18.5% CAGR revenue growth. So what's the problem? And the problem is something that is not new to Meta. They are very bold and very swift in making serious bets. And they put serious dollars behind those bets. Metaverse was one of them, which market got spooked when they didn't see much returns and they saw it as a money pit. VR Labs was another one, the Reality Labs. And this time, what has spooked market is their investments of their projected CapEx, especially of $135 billion into building their data centers and infrastructure for their AI, their big bet that they're making. Their first LLM llama was not a big success, but recently their super intelligence group came up with their latest model, which has performed really well compared to other foundational models out in the market, which gives me confidence that one, they have the ability to come up with a good model. Two, as we are seeing that models are pretty much getting commoditized. That means the incremental difference between models is kind of getting saturated. Distribution becomes more advantageous. It's the distribution that matters, whether it is Grog with XAI, Gemini of Google. Meta has a solid distribution. The second thing with Google and Meta is they have a lot of use for AI to make their products better, their ad targeting better. So they don't have to look for subscription model immediately. They can actually improve their profitability, their revenue streams for their existing products with AI. So my base case is based on these, they're able to recover their FCF margin and also the growth stabilizes without any re-rating of the price to earnings. I see a 46% upside from here. If they really hit the ball out of the park with their AI monetization, then it can be much more.

verbatim transcript · starts at 2:32