Facebook and Instagram parent Meta Platforms (META 0.55%) is a trillion-dollar stock again after taking a two-year dip below that benchmark. Meta earned its gains the hard way, posting strong financial results in the last four quarters.
But I'm not a buyer of Meta stock right now. While Meta's recent surge might look attractive, the company and stock come with a few hard-to-swallow downsides.
Meta's big bet on the metaverse idea is not bearing fruit yet, its social media empire may be vulnerable to the incoming Web3 revolution, and overly enthusiastic investors seem to have lifted the sagging stock price far too high. As a result, Meta's stock looks pricey in a period of elevated risk.
Luckily, there's no shortage of better high-tech stock ideas today. In particular, I'm excited about the artificial intelligence (AI) growth opportunities in front of Alphabet (GOOG +0.34%) (GOOGL +0.23%) and International Business Machines (IBM +0.58%).
So let's leave Meta to figure out its AI and metaverse strategies for the long haul while I give you the rundown on Alphabet's and IBM's superior shareholder value.
NASDAQ: GOOGL
Key Data Points
The ABCs of Alphabet's AI prospects
Alphabet, the parent company of Google, is at the forefront of the AI revolution. It's not a new arrival, either -- this company has been pursuing AI excellence for years. The YouTube video-sharing service uses machine learning concepts to find video recommendations. Google Photos, formerly called Picasa, analyzes your digital pictures to add handy tags and identify people. The route suggestions in Google Maps are based on real-time traffic data and advanced pattern analysis, again helped by machine learning. I could go on and on, but you get the picture -- Google has been around the AI block once or twice.
The recent focus on large language models (LLMs) and generative AI is kind of new, though. But Google was ready to face the ChatGPT threat head-on with its own LLM platform. Google Bard was renamed to Google Gemini and upgraded to take advantage of lessons learned by the Google Brain and DeepMind AI teams. It's not the only ChatGPT alternative on the table, but the other challengers are rarely seen as serious contenders to the generative AI throne.
Gemini has earned that level of respect. ChatGPT and Google Gemini will try to outdo each other with new features, better analysis, and more flexible data format options over time. But the real takeaway here is that the tech industry at large was caught flat-footed by the appearance of ChatGPT in 2021 -- while Google simply whipped out a respectable competitor in that exact category just a couple of months later.
And that readiness to tackle unexpected challenges at the drop of a digital hat is essential to my investment thesis for Alphabet. Whatever twists and turns the IT sector may take in the future, it's a safe bet that Alphabet is ready to roll with the punches. In fact, the company will more often take a leading role in dramatic sea changes such as the ongoing generative AI boom.
I'm not calling Meta a one-trick pony, but its social media focus does look rather limited next to Alphabet's broader range of abilities. Moreover, Alphabet's stock trades at 25 times earnings or 6 times sales. Facebook's valuation ratios have surged ahead to 33 and 9, respectively. In my eyes, you're paying more for a weaker company.
So Alphabet is a flexible tech giant built for long-term success, and I'm not sure I can say the same about Meta. Hence, Alphabet's stock looks like a far better buy right now.
NYSE: IBM
Key Data Points
Big Blue's business-first approach to AI
Meta Platforms' future is tightly tied to fickle consumer tastes. Centennial tech veteran IBM doesn't play that game. Instead, the company hones in on business-class customers with large infrastructure budgets and grand ambitions.
The Watsonx AI platform is quietly winning long-term contracts behind the scenes. Big Blue's preferred customers plan to use AI tools in production-ready products, services, and processes, and there's no room for error. So each new technology must survive a gauntlet of technical tests, checking everything from security and data quality to actionable results and cost-effectiveness. Only then will the prospective client's IT director put a multi-year IBM deal in front of upper-level management for a final greenlight. These deals require a staggering amount of John Hancocks, and they result in long-term commitments that will be even harder to replace.
So it may look like IBM missed the starting gun on the race to generative AI dominance, but nothing could be further from the truth. It's just a slower process in this target market, and it would be unwise to trumpet your long-term IT plans before the new systems even completed the testing sequence.
Big Blue is building a giant AI presence behind locked doors. The evidence has started to trickle out as the multi-year contracts are stacking up in the form of unfilled AI orders.
"Last quarter, I shared with you that our book of business in the third quarter specifically related to generative AI and Watsonx was in the low hundreds of millions," said IBM CEO Arvind Krishna in January's fourth-quarter earnings call. "Since then, demand continues to increase and our book of business in the fourth quarter is roughly double the third-quarter amount. We continue to have thousands of hands-on client interactions, including an acceleration in pilots that were completed during the quarter."
In other words, the order volume doubles from one quarter to the next, and IBM is aggressively pursuing even more AI deals.
This focus on steady, high-value clients makes IBM a sustainable investment in the AI space. Meta's risky bet on an uncertain metaverse future looks like an outright gamble by comparison. Furthermore, IBM's stock trades at a bargain: roughly 24 times earnings and under 3 times sales. Next to Meta's loftier valuation, Big Blue offers an attractive entry point into a company with a lengthy record of adapting to new technological challenges.
