The Next 5x AI Stock & Sector

Hey everyone, me Kevin here coming to you from London. We got to talk about an AI stock opportunity and why I think it is a more than double, probably even more than that. I think it could potentially double by the end of the year and go way beyond that over the next four. So, uh, cheers to that. Okay, first to underlay this thesis, you have to know that uh what really got me thinking about this more in just the last few days was some institutional research that was actually I was reading on into it. I was supposed to be reading about into it and then I got onto this tangent about this other stock and this opportunity that's happening elsewhere. And so let me read you this. In it is conducting a review like QuickBooks, Mailchimp, right? They're conducting a credit karma as part of that. In it is conducting a review for its US media account worth $1 billion. So media account is basically how into it IT advertises their AI services in what appears to be one of the largest pitches of the year. The reviews supported blah blah blah blah spans into its entire business. QuickBooks, Turboax, Mailchimp, Credit Karma, blah blah blah. And basically what they're going to try to figure out how to do is, hey, how can we pitch and promote our AI services that are now integrated in Mailchimp and whatever these other products uh to companies and individual small businesses, whatever, so that they use our products not only more but more efficiently. And then immediately after that I got off the plane and I I start seeing ads in the terminal at London Heathrow. This is uh a particular company here. This is called Coher. This is a Canadian multinational company. They've got like a quarter of a billion dollars in revenue already, which is actually pretty freaking impressive for 450 employees that they have. And then right after that Coher ad popped up, I saw this ad and I'm like, "Wait, I thought you guys were like totally crushing it with with revenue. Is this really just unless they're doing the Starlink strategy?" But I was kind of surprised. I'm like, "What? Really? Claude is having to advertise." So then I I see these Claude ads, too, and it's basically just banner after banner of AI ad, AI ad. And I'm like, "Huh, this is really interesting." See, Starlink did this as well before API before IPO. So maybe this is just a strategy in my opinion before the SpaceX IPO. Elon Musk dropped the prices of Starlink by 50%. And spent a crapload of money on advertising so he could go pitch in his IPO pitch deck how much user growth they have had for Starlink. Now, I'm not bagging on that strategy. I think that's what companies do before IPO. I'm bringing that up to say that plot advertising could be an IPO pump to really pump up those user numbers before IPO or given that they're right next to this coher ad and this is all being started with sort of this into it discussion. It's entirely possible that the next frontier for big dollars in investing isn't necessarily investing in the AI companies themselves, but potentially investing in some of the biggest advertising names in the world. And one of my favorites here is, I hate to say it, but Meta, where it's particularly positioned right now with a PEG ratio under 1.3. It's got an easy double in it, frankly, potentially by the end of the year if software really turns around, though no guarantees there yet. Uh, but its valuation would support a double by the end of the year and much more than that over the next four years, potentially four or 5x uh pretty rapidly. Now, what's fascinating is there's some institutional research that indicates that advertising agencies have been growing faster than Goldman Sachs researchers have been predicting. their models have been predicting a certain set of growth and they're actually seeing advertising inflect upward particularly because of spend by large AI companies. So really what seems to be like I'm already convinced mind you that uh Claude Gemini Gro all of them are basically commodities and the biggest and most important thing that you could do is get users and so I think that's exactly what the fight is for Grock and Meta and for these others is to get users except Meta already has the users. See, Elon Musk regularly cites that X, Twitter, uh, has active users of about 600 billion active users per month on X. That's great, but Meta has almost six times as many users in their family of apps per day. So, Elon's using the monthly figure for X, which I mean, I I I personally I have my X usage has plummeted. I mean, you follow me on there the rare time I post, although I don't think they really promote the stuff I post anyway. Uh, I personally find that when you go on X, you're getting more and more AI slop on a daily basis. It's pretty bad. But whatever. Elon sites a monthly active user base at about 600. Um, let me just make sure I said that right. That was 600 million. If I said 600 billion, that was a mistake. 600 million. Meta sits at 3.56 billion. So that's about 6x that. Uh and again they use a daily basis figure. Now what's interesting is Meta's, you know, large number here. You kind of start running against how many people are there in the world who could actually use Instagram and Facebook, which is where most of Meta's advertising money comes from. But they've only grown that about 4%. But despite only growing the amount of active daily users year-over-year, 4%, their ad impressions are up 19% year-over-year. And the average price paid per ad is up 12% year-over-year. So even though user growth is 4%, companies are paying three times as much money compared to the user growth on a year-over-year basis for ads because there has to be this AI enhanced ROI that companies are seeing and are willing to pay for. That's essentially the definition of pricing power. You know, we've noticed that uh Meta's expenses, for example, were up 35% year-over-year, which usually we're like, man, that's a lot. But they've actually grown their operating margins uh to 41% despite this 31% or sorry, this 35% surge in total expenses. So like they're they're growing margins while their expenses are rising, which suggests their pricing power is growing. They've got large PP, which is really good. Now I know a lot of people don't like suck and you know there's there's a lot of sort of like social media hurts children and get social media off children and these antitrust risks related to the company not just antitrust but also like social media government liability like how liable are these big tech companies going to be for you know mental health or whatever those are all real risks and so we don't want to downplay those but some of the things that are very interesting in terms of what they're doing is they are now uh eval evaluating when you're on Instagram or Facebook your likeliness to purchase something and if you're a potential high value conversion target they will actually feed your algorithm into a more compute intensive architecture to then rank products to you uh in in in basically a a spendier way because they think they're more likely to make more money on you. So now what you really have is AI determining how likely are you to spend and based on your likeliness to spend, we're going to invest more into the algorithm on converting you. And it's structurally working. It's kind of brilliant. So it's sort of like AI is deciding when to spend more on AI to sell you stuff, which in some sense is kind of creepy. you know, the company uh has had sort of like petitions inside of the company itself that users or employees of the company don't want their data extracted because Meta has been considering and likely implementing this practice of tracking your mouse movements and and you know, whatever you're doing on your computer so they could train new AI models to basically replace you, which is, you know, basically going to lead to this massive rise in socialism. Uh although socialism does lead in in some cases to more consumerism and and where do you find things to buy but social media? So there's this really weird like doom loop here. Uh but anyway, they're using AI so much at Meta that uh as of the end of the first quarter they grew headcount year-over-year 1%. But then they decided ah we're actually going to slash our company by 10%. They're laying off about 8,000 workers. Not only are they laying off 8,000 workers, but then they reassign 7,000 workers to AI related initiatives. And my guess is if you know some of those initiatives don't work out, let's say you put 7,000 workers on 10 initiatives. If eight of those 10 initiatives don't work out, well then they'll just fire eight out of the 10 of those reassigned people. So what whatever that is, you know, 5600, right? Workers just end up getting fired. So, sort of like you're you're on the chopping block, which sounds rough because the company is really making more money and it's it's crazy because, you know, revenue growth is up uh their uh revenue growth is up 33% uh across the board, which is fantastic. And, uh their total net income has exploded beyond that. So, remember with 4% user growth, somehow their revenue is up 33%. You have to kind of think about the scale of how much more money they're making from advertising and how it relates to the commoditization of AI. All these AI companies are going to need customers. But anyway, their net income is up 60%. Now, some of that is because of uh uh benefits from likely uh artificial intelligence hardware depreciation, which then gives you some more tax benefits. So, if you actually look at the income before taxes, it's not as juicy. That's always good to look at that nuance. You're only up about 18.3%. Uh, and if you actually look at income from operations, uh, you're up currently, let's see here, 1755, you're up about 30%. So, not all of it came through to the bottom line. Uh, and part of that is because they're blowing money on R&D. They spent 45.6% more year-over-year on R&D. And they didn't actually spend much more on marketing. Now, that tells us a couple things that I think is very interesting. They only spent 5.4% more money on their own marketing. So, who does Meta Market to? Well, Meta Markets, for example, this is one of the reasons I do like traveling is uh you know, I I'll make a reservation with like the sixth rental car company and I'll get uh AI WhatsApp chat messages and I can communicate with that AI, ask for obviously a live support person in, you know, the time that you need one. But the bots have actually gotten pretty good and Meta owns that platform, right? WhatsApp. So, they sell businesses those AI bots and the infrastructure to make it pretty easy to interact with their customers. And globally, less so in the United States. Globally, WhatsApp is really popular, much in my opinion, less so in the United States, but I do think there are plenty of people who use it in the United States. I just don't use it in the US. I really only use it when I'm abroad. Uh, but I think this is very interesting because even though the company has more of these products and services, they're only increasing their own advertising 5%. But yet their revenues are up 33%. Which to me signals again pricing power. People are coming to the business because they make money on Instagram or Facebook. The vast majority of their revenue from advertising comes from Instagram and Facebook, not threads, you know, nothing else. I mean, yeah, they they want to potentially monetize compute. uh which you know Mark Zuck has recently been clarifying some of his uh points of view on this. His idea is that there are companies and SpaceX was an example of what his inspiration was for this. He says there are companies like SpaceX that are getting these deals from Anthropic or these other companies that are throwing themselves at SpaceX because they want the compute. They want to secure compute so they can, you know, rapidly accelerate their LLM growth and stay ahead of the competition. And Mark is basically saying, hey, you know, we have the compute architecture, we have the LLM architecture, and we've got the AI talent. We've got this sort of trifecta here of the business of AI. Uh, and it's all funded by massive advertising revenues. So, you got this trifecta of AI, massive advertising revenue, and they both sort of help each other out. but he's essentially saying, "Hey, we're willing to sell some comput if people are going to make us crazy deals because we're going to make really good money with that." And I think this is part of where we're at this turning point where Meta has actually been inflecting down for quite a while. It has not been a very sexy stock to own. Uh just full disclaimer, I'm u invested in Meta and the stock has come down. It's been downtrending from about 780 since about August of 2025. uh it's been on this downtrend uh and you know every time it seems to drop under $600 it seems to be a good buying opportunity. It's at about 670 right now 669. But uh point of this is Zach is kind of here in the second quarter saying look first quarter we had great year-over-year revenue growth. We barely spend more attracting customers and we're making all this money. We're getting more and more efficient by the day with how we're able to convert customers. We're looking deeper into customers viewing histories which is actually giving us a better snapshot of who they are and what they like and that's also increasing conversions. They specifically said they doubled the length of user interaction sequences for training for deeper interest modeling and that has been improving cont uh content delivery. Anyway, making more money on making more money. And in the second quarter, Mark Suck is really turning to this model of all right, well, let's let's start making some money here. Let's lay off maybe where our initiatives aren't winning. Let's reassign where we can. Let's take some of these really high margin compute deals when we can because people are going to throw this money at us. Why not? And then keep in mind Meta has a lot of offbalance sheet uh lease commitments which I don't really like that because I think it damages the balance sheet. Not my favorite. Uh you know they've got just enough I mean they've got plenty of cash and marketable securities frankly if you include their receivables in as well about $17 billion. I got 23 billion cash 57 marketables and 17 receivable. If I add all of that together I've got almost hundred billion in liquid assets in Q1. And I look at that versus their bills. They're at about $48 billion in bills, $79 billion in other longerterm debt. So, we got plenty to pay for our current uh expenses, but not if we add in all of our other long-term debt as well. So, you know, the balance sheet is getting a little bit tighter, especially when you consider some of those offbalance sheet risks. But we know about those blue owl deals or some of those data centers that Meta has committed to have outs that are really good for Meta. So, you know, Zuck Zuck's kind of hedging himself in all ways and I think Q2 is this inflection point where he's saying, look, I'm going to hedge like we're going all in on AI, but I'm going to now hedge myself on some of our expenses. We're going to reduce stock comp and we're going to reduce salary expenses for the people that are laid off. Obviously, stop spending on salaries and stock comp. We will pay the people we want to retain more money and more stock compensation. And when somebody wants to throw a ridiculous number at us for compute, we'll go ahead and sell it to them. It's not necessarily an inflection point in the AI market yet, unless capex rolls over, which there's no indication of capex rolling over yet. Uh, you know, this company, for example, still in the first quarter spending uh $19 billion on capital expenditures, although they had cash flow of $32 billion. So they still had $13 billion of free cash flow in Q1 even though a lot of other companies uh a lot of even some of the other mag 7 companies are spending almost all of their free cash flow whether it's Microsoft or Amazon or Google you can kind of analyze those companies individually Microsoft is ma is maintaining some spread actually a good amount I mean even last year they spent uh in the in Q1 they spent $13 billion in capex and uh they had free cash flow of about $9 billion. So, they still got plenty of cash flow, plenty of cash flow to pay their bills. The business is growing like crazy. And to me, as they become more efficient, Q2 probably is going to mark a bottom for for Meta, you know, absent obviously a recession, not personalized financial advice here either, but the company's clearly going through a cleanup uh of efficiency in employees, efficiencies in compute, picking up margin where they can. They're tripling users on the meta glasses. Really big fan of the meta glasses, especially when I'm traveling with my family. Big fan of them. Obviously, you know, not sponsored here. Just saying like there are moments that I capture on these that I just otherwise wouldn't be able to capture because of the time it takes to get a phone out or uh the inconvenience of holding something while you're trying to do something. Like, let's say you go to a baking class. It's kind of hard to be baking with flour all over your hands with your kids and holding a phone at the same time when you could just be wearing the glasses and capturing those moments, which is also kind of weird because then it sort of feeds into AI, right? you're feeding into uh helping Meta learn visual AI more than any other company has been able to because they're literally getting the person's POV, which I wonder what that could be worth uh selling that sort of data to uh you know, a manufacturer of let's say Optimus Robots one day in the future. But I'm really optimistic here. Uh I have to say uh the price target I have for this company exceeds $1,377 by uh the end of the year. I don't know if we're going to get it by the end of the year. I recognize software and mag 7 have really been the lag seven and lagging software but uh I you know I have a lot of conviction in the name so I want to be very clear about that and wanted to share some of those thoughts and I think there is a commodization of AI that's happening and the advertising companies the companies that you sell advertising have inventory to sell even even you can include Netflix in that bunch uh as well as Google with YouTube and otherwise they're going to make a lot of money advertising the very AI products that they are also competing in which is kind kind of incredible and weird to think about at the same time. Anyway, thank you so much for watching. Consider subscribing to the channel and uh wow, we didn't even do a sponsor in this video or like well I guess we don't do sponsors but like a kind of pitch or anything. That's crazy. Well, we won't ruin it. All right. See you.