Meta stock cheap despite AI-led rally, but legal overhang still clouds outlook

Shares of Meta Platforms rebounded sharply this week after the company unveiled a new artificial intelligence model, offering investors a fresh catalyst following a period marked by legal challenges that led to the stock's underperformance.

The stock rose about 9% on Wednesday, its biggest gain since January, supported both by easing geopolitical tensions and the launch of Muse Spark, a flagship model from the company’s newly formed Meta Superintelligence Labs.

Shares extended gains with a further 2.6% rise in Thursday’s session.

The rally helped Meta recover losses triggered by recent court rulings that found the company liable for harms linked to content on its platforms.

Muse Spark signals renewed AI push

Muse Spark, previously codenamed Avocado, marks Meta’s first major AI release since hiring Alexandr Wang and investing $14.3 billion in Scale AI.

The model is the first in Meta’s new Muse series and underscores the company’s ambition to compete more aggressively in the AI race.

Analysts said the launch reinforces Meta’s positioning among leading AI developers.

“Muse Spark clearly establishes Meta as an active and credible participant in the model race standing shoulder-to-shoulder with leading players,” said Mark Shmulik of Bernstein.

JPMorgan analyst Doug Anmuth echoed that view, noting that the release should “provide increased confidence in Meta's scaling trajectory and improve investor sentiment.”

The new model is expected to enhance Meta’s core advertising business while opening additional monetisation avenues across its ecosystem, including AI-driven services and messaging platforms.

Stock still undervalued despite rally

However, despite the recent rebound, Meta’s stock remains down about 11% over the past six months, reflecting investor concerns around rising capital expenditure and regulatory risks.

Analysts at Evercore said the stock is still undervalued.

“Even with the recent mini-rally, Meta shares are dislocated, trading at an 18x price-to-earnings ratio, within about 10% of its trailing three-year trough multiple,” said Evercore ISI analyst Mark Mahaney.

He maintained an Outperform rating with a $900 price target, implying potential upside of around 43% from current levels.

Mahaney added that the Muse Spark launch demonstrates Meta’s ability to translate heavy AI spending into tangible products that could drive long-term growth.

Legal overhang clouds outlook

Even as the AI narrative gains traction, legal risks continue to cast a shadow over the company’s outlook.

Recent court verdicts found Meta responsible for harms linked to content on its platforms, raising the possibility of further litigation.

Dan Gallagher of The Wall Street Journal warned that the rulings could have broader implications.

“Any hope for a sharp recovery could be blunted by the recent court verdicts,” he wrote, pointing to the risk of a domino effect from thousands of pending cases.

"Although Meta has considerable means to fight and appeal, the prospect of prolonged legal conflict could act as a brake on the stock for some time," he said.

He added that while the financial impact of the recent case—$6 million in damages—was minimal relative to Meta’s scale, the legal findings themselves could prove more consequential.

The ruling concluded that the company’s platforms were designed in ways that made them addictive to younger users, a determination that could challenge long-standing legal protections under the Communications Decency Act.

Meta has denied the allegations and said it plans to appeal.