On April 8, Meta (NAS: META) launched Muse Spark, a multimodal reasoning model with advanced tool use and agent orchestration capabilities. The model’s performance on various industry benchmarks was loosely in line with state-of-the-art models such as Anthropic’s Claude Opus 4.6 and Google’s Gemini 3.1.

Why it matters: A key bear case against Meta has been that, despite spending tens of billions of dollars on AI, the firm’s AI models have lagged those of leading-edge AI labs by a fair margin. We see Muse Spark as the first real model capable of competing with leading AI labs, a major win for Meta.

  • We expect Meta to release more advanced versions in the Muse family of models, and we see value accruing to Meta in two key ways. First, we expect the firm’s data and ad targeting to improve, as Muse models can better analyze the troves of user data Meta collects for ad purposes.
  • Secondly, with better AI features, including health-related ones, we expect Muse models to drive both sessions per day and time-spent-per-session higher, leading to more ad impressions and sales for Meta across its various platforms.

The bottom line: We maintain our $850 fair value estimate for wide-moat Meta. We continue to view shares as materially undervalued, even after accounting for the post-model-launch rally in share price.

Key stats: We noted Meta’s disclosure that Muse Spark is significantly more compute-efficient than Llama 4, the firm’s previous model, as well as open-source models by Chinese labs, including DeepSeek and Kimi.

  • We think this improvement in efficiency is important in the context of digital ads, with Meta now being able to run agentic and reasoning-capable ad optimization and targeting at a lower marginal cost per ad served.

Meta is a social media behemoth with strong growth ahead of it

We view Meta as the clear winner in social media. The firm’s application lineup, which includes Facebook, Instagram, WhatsApp, and Messenger, has close to 4 billion monthly active users, giving Meta unmatched scale in the sector.

The firm’s strategy is dual-pronged. On the user side, Meta has leveraged its scale and social media savvy to iteratively improve its product lineup, adding attractive features such as Stories, Reels, and even new products such as Threads. Such improvements/additions not only improve user engagement, but also allow Meta to monetize these features/products by layering advertisements onto them.

On the advertising side, Meta allows advertisers of all shapes and sizes to place ads in front of engaged users. The company has benefited greatly from a general shift toward digital advertising within the broader advertising market, with social media advertising gaining substantial share, especially since the covid-19 pandemic. To bolster its advertising business, Meta has invested heavily to improve its ad-targeting algorithms, allowing it to improve its advertisers’ return on ad spending and increasing its average revenue per user over time.

While the firm’s core business remains advertising, Meta has shown a proclivity to expand beyond its ad-based revenue model by investing heavily in hardware, via Reality Labs, and AI, by investing in its own Llama large language model. While the firm’s investments in Reality Labs have been demonstrably unprofitable, we are more optimistic about Meta’s investments in AI. We believe Meta’s AI investments, especially those aimed at improving the firm’s ad-targeting algorithms, are value-accretive.

Beyond ad-targeting, Meta is also investing in consumer-facing AI, via its Llama chatbot, which is accessible to users across its applications. While a monetization strategy for this chatbot remains elusive in the near term, we believe the firm could drive increased user engagement/time spent by allowing its users access to a chatbot assistant within Meta’s applications.

Bulls say

  • Meta’s core advertising business has benefited greatly through improved ad targeting and content recommendation algorithms as well as a secular increase in digital advertising spending.
  • Meta’s scale, with the majority of the world’s internet-connected users accessing its applications, allows it access to high-quality user data which it can package and sell to advertisers.
  • The firm has an opportunity to drive more ad inventory growth, leveraging new products such as Threads while also improving its monetization of ads on more nascent features such as Stories and Reels.

Bears say

  • Meta’s investments in Reality Labs and generative AI stand to lose the firm billions of dollars annually, taking some of the shine off its overall business.
  • The firm has a monopoly case against it in the US which could potentially force it to break up, severing some of the scale advantages it has built up over time.
  • Meta has disproportionately benefited from increased ad spending by Chinese retailers including Temu and Shein. A slowdown in spending by these firms could hit Meta’s growth.