On March 13, the U.S. House passed a bill that would ban TikTok, the Chinese-owned social media app, if it’s not sold.The move came over the objection of former President Trump, who instead called Meta Platforms (NASDAQ:META) “the enemy of the people.” This will have big implications for META stock holders.
Investors are being told two different stories on how to play this. It might benefit the Meta ad platform. But Meta fell 4% a few days before the vote.
Who’s right? Who’s wrong? Only one person can decide.
That person is you.
Meta Cheers
Since the AI boom kicked off in earnest with the launch of ChatGPT, META stock has been among the biggest beneficiaries. Shares are up over 300%. Investors have cheered CEO Mark Zuckerberg’s delivery of open source language models.
Zuckerberg has also dramatically increased the company’s capital budget. Meta could spend up to $37 billion this year upgrading its data centers. That’s over 75% more than AT&T (NYSE:T), once the king of capital spending, will put into its network in 2024.
Meta is positioning itself for a consumer-led AI boom, with creatives building immersive experiences built on voice prompts. Generative AI can create stories, images, short films, and computer code off the voice prompts. Meta insists it is not expecting this to drive results in 2024.
All this new content will feed into Meta’s ad platform, which is the main competitor to Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Ads. The two Cloud Czars have taken over the ad business through precise targeting and run-of-network pricing. Thus, any boost to traffic should benefit Meta.
In theory, a ban on TikTok will benefit Meta’s ad platform, and boost the business of Meta’s Reels. Meta has also gone after Twitter with its Threads service, as Instagram leads its growth under Adam Mosseri.
Meta Blues
The problem is that any move against social media is a threat to Meta, not just because Trump dislikes it.
Like the other Cloud Czars, META stock is facing regulatory pressure from all sides. Europe’s Digital Markets Act will add content policing costs to its platforms. In pushing her “Burn Book” on TV, journalist Kara Swisher has also criticized Zuckerberg directly, calling his team a privileged “boy’s club.”
Ad-hoc global rulemaking means that Meta services look different depending on where you are. What’s legal in one place may be illegal somewhere else. The cost of all this is increasing.
Then there’s the question of AI itself. Growth on the consumer side may already be slowing, even while business use cases show productivity growth. The problem here is that Meta is almost entirely a consumer-oriented business.
That means Meta’s AI benefits may kick in much later than those of its rivals. What comes out may also face heavy regulation, and lawsuits from creatives.
The Bottom Line
Meta is currently priced to perfection.
It has a price to earnings ratio of 33 and a yield on its pending 25 cent/share dividend of just .4%. The dividend and huge stock buybacks, announced with its most recent earnings, have sent it up 20% in a little over a month. But they haven’t changed the investment case.
Analysts are expecting nearly $20/share of earnings this year, with one predicting over $28/share in 2025. To reach that, Meta will have to score big share gains over TikTok and Twitter. It will have to continue building a global footprint against increasing global government regulation. At some point it will need to slow its Cloud spending while it absorbs new types of traffic.
If I owned Meta stock, I’d sell it here. It’s in the eye of a regulatory hurricane, and getting knocked off-course in a hurricane, at least for a while, is inevitable.
As of this writing, Dana Blankenhorn had a LONG position in GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his free Substack newsletter.