Meta Platforms (META +3.78%) released its Muse AI agent about two weeks ago, and it appears to have another hit on its hands. The Muse app has climbed to the top of the app store charts in recent days, ousting OpenAI’s ChatGPT. That has made many Wall Street analysts optimistic that Meta’s massive AI spending may be about to pay off.
People are using Muse for all sorts of activities, with Meta positioning it as a virtual personal assistant. It can book tickets, shop, and send messages on users’ behalf, and Meta is offering these advanced capabilities to most users for free. Power users may need to subscribe to one of its paid tiers for $20 or $100 per month to get the most out of the AI agent platform.
Many analysts are highly focused on the value of Muse and Meta’s ability to directly monetize the service. The stand-alone app’s ascent on the app store charts led many analysts to upgrade Meta stock, and the wave of upbeat news pushed the price up 11% in a single day. But some may be overlooking a key reason why a highly engaged Muse AI user base could be so valuable to Meta Platforms’ business.
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The most widely used consumer application since ChatGPT
“While it is still early, we believe that Muse has the potential to become the most widely used consumer AI application since ChatGPT,” J.P. Morgan analyst Doug Anmuth wrote in an investor note.
Since the app’s launch on Sept. 8, it has racked up over 2.5 million downloads. That’s not quite on par with ChatGPT, which had 3.1 million downloads in the same time frame, but it’s close. Keep in mind, ChatGPT was the fastest-adopted consumer platform in history, gaining 100 million users within two months of its launch. Results anywhere near that would put Meta well on its way to having another billion-user app.
A high user count, however, won’t necessarily mean Meta will turn a profit on its AI spending. OpenAI is reportedly still unprofitable despite having over 1 billion weekly users.
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ChatGPT has converted about 5.5% of its weekly users into paid subscribers. Considering the generous access levels that come with the free tier of Muse, Meta’s conversion rate might be even lower. Even with 1 billion users and a 5.5% conversion rate, 55 million subscribers, generating an average of $25 per month, would translate into about $16.5 billion in annual subscription revenue. Considering that Meta generated over $228 billion in revenue over the last 12 months, some might see the 11% gain in its stock price, adding well over $100 billion to its market cap, as an overreaction.
In fact, it looks like an underreaction to me. Because the value of Muse doesn’t just stem from subscription revenue, but from the user data it can provide.
Meta isn’t just another AI company
With Muse, Meta gains access to a stream of extremely valuable user data that has long been dominated by its two biggest rivals in digital advertising. Users are explicitly telling Muse what they want now, be it a new outfit, plane tickets, or a weekend itinerary. That’s the kind of information previously only shared in the search box on Alphabet‘s (GOOG +1.08%) (GOOGL +1.42%) Google or on Amazon‘s (AMZN -0.06%) website.
Advertisers pay a premium for Google ads compared to Meta ads because users actively searching for something have extremely high purchase intent. Meta can come close to determining exactly what ads its users will be most interested in at any point in time, but there’s nothing that compares to the signal of a Google or Amazon search. With Muse, it gains an engaged base of users who are interacting with the app while they have high purchase intent.
What’s more, given how Muse works, it knows whether the user followed through. That gives it an opportunity to re-target ads to users, which will likely result in higher conversion rates for Facebook and Instagram ads. Better ad conversions lead to higher ad prices.
Meta’s ad business generated revenue of $227 billion over the last four quarters. Each 1% improvement in ad pricing would amount to a $2.27 billion increase in revenue.
While there’s potential for Meta to put ads in Muse at some point (OpenAI started showing ads in ChatGPT earlier this year), investors shouldn’t discount the value of Muse for the giant advertising business in the immediate term. Nonetheless, amid the excitement about potential subscription revenue from Meta’s AI efforts, many seem to have forgotten Meta’s core business and how the new app’s engagement could improve it.
Even after the stock’s recent pop, it trades at less than 24 times expected forward earnings. That’s still a great bargain for the company, which could see an earnings-per-share boost as Muse AI drives revenue growth in ways that go well beyond its subscriptions.
