Meta stock looks undervalued: settlement and AI could unlock up to 40% upside

Meta Platforms could be approaching a turning point similar to the one that helped propel Alphabet’s stock higher last year, as the social media company clears a major legal overhang while preparing a new wave of artificial intelligence products.

Shares of Meta currently trade at about 16 times forward earnings, roughly 25% below the company’s long-term average and around 45% below their 2025 peak, according to Morgan Stanley analyst Brian Nowak, MarketWatch said.

Meta recently agreed to a $17 billion settlement over allegations that its social media products contributed to addiction and harm among young users.

While the payment is substantial, Wall Street analysts believe resolving the litigation could allow investors to focus more closely on Meta’s product pipeline, AI investments and advertising growth.

Alphabet’s legal reset offers a template

Nowak sees a parallel between Meta’s current position and Alphabet’s experience last year.

Alphabet resolved the Justice Department’s landmark antitrust case concerning Google’s search dominance in September 2025.

Following the legal development, the company’s price-to-earnings multiple expanded by about 40% in the final quarter of the year as investors became more comfortable valuing its artificial intelligence ambitions.

"There are certainly signals, in our view, that Meta's product pipeline could start flowing following this legal clearing event," just like Alphabet's did, Nowak wrote in a Sunday note.

Nowak rates Meta overweight and has set a $775 price target, implying about 36% upside from current levels.

The analyst believes Meta has several products that could potentially change how investors value the company, including an improved MetaAI, agentic advertising tools for small and medium-sized businesses, new subscription offerings and a potential cloud business.

Collectively, those products could add more than $10 to Meta’s earnings per share, according to Nowak.

With the stock trading at a significant discount to its historical valuation, he believes investors are not yet fully pricing in that potential.

AI could provide the next growth engine

Meta’s biggest opportunity may lie in turning its enormous user base into a distribution advantage for consumer AI.

Reports have indicated that Meta is preparing to launch a consumer-focused AI agent called Hatch, which could operate natively within Instagram and WhatsApp.

According to reports, Hatch would be designed to perform tasks autonomously through its own virtual computer, including browsing websites, making online purchases, booking restaurants, completing forms and communicating through email and text messages.

The system is also expected to be highly personalized, learning users’ preferences and retaining information over time.

Meta is reportedly considering a subscription model for Hatch, with premium tiers potentially costing as much as $200 a month.

BofA Securities reiterated a Buy rating and an $810 price target on Meta following reports that the company could launch the AI agent in early September.

The target represents roughly 40% upside from the current price of $578.

BofA believes Meta’s enormous global user base gives it an important advantage in distributing new AI products.

That distribution could be particularly valuable in the consumer AI market, where companies including OpenAI and Google are competing to establish their assistants as everyday tools.

Watermelon could strengthen Meta’s AI push

Meta’s AI ambitions extend beyond its consumer-facing applications.

Reports indicate the company is targeting an October release for a new flagship foundation model, code-named "Watermelon".

The model is expected to eventually serve as the primary inference engine powering Hatch after its initial launch.

The development could give Meta greater control over the technology underlying its consumer AI products while potentially improving its ability to handle increasingly complex tasks.

However, the company still faces a significant challenge in converting AI interest into sustained consumer adoption.

Consumer use of autonomous AI agents remains in its early stages, and Hatch will need to offer a meaningful advantage over products built by OpenAI and Google.

That makes the quality and usefulness of the product critical to Meta’s ability to turn its AI investment into another major revenue stream.

AI is already strengthening Meta’s advertising business

Investors do not necessarily have to wait for Hatch or Watermelon to see financial returns from Meta’s AI spending.

The technology is already being used to improve the company’s core advertising business through better content recommendations, increased engagement and more sophisticated ad targeting and delivery.

"The latest few quarters showed us that AI is strengthening, rather than disrupting, the competitive position of the largest advertising platforms," Bernstein analyst Mark Shmulik wrote in a Monday note.

Shmulik believes Meta could emerge as one of the biggest beneficiaries of AI-driven digital advertising.

Meta could be the "biggest AI winner in digital ads," Shmulik said.

"Excluding 'other' ad revenues including Maps and Gmail, we suspect Meta may already have caught up to Google search," he said.

The analyst expects Meta to officially overtake Google search in advertising revenue by the end of 2026 and potentially surpass Google’s overall advertising business around 2030.

If that forecast proves accurate, Meta’s AI investment could increasingly be viewed not simply as a costly technology bet but as a driver of market-share gains in its core business.

Regulatory changes could be less damaging than feared

The $17 billion settlement also introduces restrictions on how younger users interact with Instagram and Facebook.

Meta will impose daily usage limits and provide users under 18 with an option to use nonalgorithmic feeds.

The settlement also includes a provision under which $5.3 billion of the total payment is contingent on TikTok and YouTube reaching similar agreements.

Nowak believes this could leave Meta relatively well positioned against competitors.

"We believe youth engagement ceilings like these would actually be a larger headwind to YouTube than Meta," Nowak said, noting that the average user spends 73 minutes a day on YouTube.

"We believe youth adoption of YouTube is higher" than it is for Facebook and Instagram, he added.

That could soften concerns that the settlement will materially weaken Meta’s competitive position.

Investors still need proof

The bullish case ultimately depends on execution.

Meta is spending heavily on AI infrastructure and talent, while the financial returns from some of its newer initiatives remain uncertain.

Hatch will have to demonstrate that consumers are willing to use an autonomous AI agent regularly, and potentially pay for premium features.

The company also needs to maintain growth in its core advertising business while navigating increasingly stringent regulation.

Still, the combination of a discounted valuation, a major legal hurdle moving into the background and a growing AI product pipeline gives Meta a potentially attractive setup.