Meta Stock Faces This Big Risk, Despite AI Ambitions

Meta Platforms (NASDAQ: META) recently introduced its latest artificial intelligence (AI) models based on the new Llama 4 foundation model, as the company continues to advance its AI initiatives. Llama has significantly enhanced user engagement and increased the time users spend on its social media platforms, contributing to Meta's substantial growth in recent quarters.

Advertisers also utilize Llama to develop more effective campaigns and improve audience targeting, resulting in a 6% increase in ad impressions and a 14% rise in average ad prices for Meta last quarter. Overall, the company achieved robust revenue growth of 21% in the fourth quarter.

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However, the company faces one significant risk, at least in the near to medium term.

Ties to Chinese sellers

At the end of 2022, Meta's stock was in the dumps. Many investors had begun to write the stock off, questioning whether Facebook was a dying platform. However, revenue growth began to accelerate at the start of 2023 after several quarters of declining revenue in 2022. By the time 2023 ended, Meta's Q4 2023 revenue growth was a robust 25%.

Much of that renewed growth can be attributed to Chinese advertisers, who boosted their spending on Meta's platform helped by lower shipping costs and easing regulations. This was also a period when a few large Chinese e-commerce companies that sell goods directly to the U.S. began to aggressively market to U.S. consumers. This includes Temu, owned by Chinese company PDD Holdings, which even ran pricey commercials during the Super Bowl that year. In response, competitors such as Shein also increased their marketing spending.

In Q4 2023, research firm Sensor Tower estimated that Temu increased its spending on Facebook by 318% year over year, and by 101% on Instagram. It was estimated that it spent $2 billion in advertising on Meta's platforms that year.

That strong ad spending continued until Temu's ad spending cratered recently in response the U.S.-China trade war. Data from marketing intelligence company Pathmatics showed Temu's spending on Facebook dropped from over $1 million a day to nearly zero.

With around $2 billion in annual ad spending, Temu represented just over 1% of the $165.4 billion in revenue Meta produced in 2024. However, in total Chinese e-commerce companies accounted for about 11% of its revenue last year. Facebook is blocked in China, so this revenue comes from Chinese companies selling to U.S. consumers. Losing this revenue, along with an overall ad market slowdown, could slow Meta's revenue growth.

Image source: Getty Images.

Longer-term AI ambitions

Though the China-U.S. trade war poses short-term risks, it will likely to be resolved eventually. Meanwhile, Meta's new AI models may significantly influence its long-term trajectory.

Meta introduced three new AI models based on its new Llama 4 large language model (LLM). All three were trained on text, image, and video data, making them multimodal. These models use a mixture of experts (MoE) architecture, which deploys sub-models (or "experts") to handle different parts of a task so they are done more efficiently.

Maverick is its model for general information and chat. It says it excels at things such as creative writing and image understanding. Its smaller model, Scout, meanwhile, is a general-purpose model that excels at things such as multi-document summarization and reasoning over vast codebases. Its largest model, Behemoth, is still in training, but Meta said it already outperforms some competitors on several STEM benchmarks. The company called Behemoth one of the world's smartest LLMs.

Meta said these three new models were just the beginning of what would sprout from Llama 4. The company has longer-term ambitions of its Llama model becoming the go-to AI assistant with agentic capabilities.

Is the stock a buy?

Given the near-term headwinds Meta is facing related to its exposure to Chinese advertisers, I'd expect some volatility in the stock as the U.S. trade war with China rages on. If this continues, the stock will likely stay under pressure.

That said, Meta remains well positioned as a leading digital marketing platform. Its early AI efforts are driving revenue growth, and it continues to invest in this area. Llama 4 represents the next step in its AI strategy.

Trading at a forward price-to-earnings ratio (P/E) of 20.5 times, the stock is attractively valued at its current levels. However, the earnings component of that equation could decline if the trade war continues.

Therefore, I would look to slowly accumulate the stock at current levels and be ready to buy more shares on any dips.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.