Meta Platforms (META.US) shares have finally broken through. The Facebook parent company's stock soared 36% in September after it launched its personal AI assistant Muse. The assistant quickly climbed to the top of US app rankings and eased market concerns that massive AI spending would not generate returns. Meta shares are on track for their best monthly performance since July 2013, and are only about 1% away from joining the $2 trillion market cap club.

Muse as Catalyst, a Dramatic Stock Reversal

"For the past year and a half, Meta's stock has been roughly flat as people were uncertain whether AI would bring positive or negative effects, and now Muse has clearly validated the correctness of its AI strategy and positioning," said Rob Biederman, co-founder and managing partner of Asymmetric Capital Partners, adding: "AI agents will become the entry point to the internet for many people, which is logical and gives Meta an advantage in the competition."

This month's rally marks a dramatic reversal for Meta's stock. For most of this year, Meta's shares had been languishing amid market skepticism over its massive AI investments and legal risks from lawsuits targeting its social media business. Less than six weeks ago, after Meta issued disappointing revenue guidance in late July, its shares were down 18% year-to-date, and as of August 18, the stock was among the 50 worst performers in the S&P 500 Index.

Since then, however, Meta has become the third-best performer in the benchmark index, gaining 43%. The rebound began late last month when Meta agreed to pay up to $18 billion to settle a social media lawsuit, removing a major headwind. But the biggest driver has been optimism about new AI products and their potential revenue boost, which has convinced investors like Biederman that Meta shares still have room to rise.

One sign of investors' enthusiastic response to Muse is that they have been selling stocks across multiple industries on fears those companies could be disrupted, similar to the selloff triggered by AI startup Anthropic earlier this year. Meta has announced a grocery sales partnership with Instacart parent Maplebear, as well as a partnership with online travel company Expedia.

At an event on Wednesday, Meta unveiled several products that analysts praised, including a handheld device to accompany Muse and a camera-free version of its smart glasses lineup. JPMorgan analyst Doug Anmuth wrote in a September 10 report: "Meta is still in the early stages of releasing frontier models and AI-driven products beyond advertising, and there remains significant upside potential." He upgraded the stock from "Neutral" to "Overweight."

AI Bet Squeezes Cash Flow, Valuation Divergence Remains

Of course, Meta still has a long way to go in proving that its AI investments can generate sufficient returns to justify the massive spending. Capital expenditure this year is expected to approach $140 billion, double the roughly $70 billion in 2025. That figure is projected to rise to $197 billion next year and reach $215 billion by 2028.

The enormous spending is putting pressure on the company's financial position. After generating $46 billion in free cash flow last year, Meta is expected to post negative free cash flow of $6.4 billion in 2026 and negative $29.2 billion next year. This puts growth pressure on the company. Analysts on average expect sales to grow 26% to $254 billion in 2026, with net profit projected to rise 33% to $80.6 billion. But revenue and profit growth are expected to slow to 20% and 9% respectively next year.

Data shows Meta trades at 21 times forward earnings based on the next 12 months' expected profit. While that is significantly higher than the level of less than 14 times at its June low, it is roughly in line with its average valuation multiple over the past three years and represents a slight discount to the Nasdaq 100 Index's 22 times.

"Currently, Meta's valuation multiple is below the market average, yet its growth rate is above the market average, which in itself is attractive, and it also has enormous scale and distribution channels that competitors would find very difficult to match," Biederman said.

Wall Street remains broadly bullish on Meta, with more than 90% of analysts tracked by institutions giving it a "Buy" rating. However, its stock price is close to the average analyst target price, suggesting limited upside over the next 12 months.

Brandon Pizzurro, chief investment officer at GuideStone Funds, said that given the magnitude of the rally, Meta shares are vulnerable to a pullback because views on the AI services market can change quickly. He helps manage $29 billion in assets. "As new AI models continue to be released, the market's views on large tech companies seem to shift just as frequently. Products like Muse bring brief, catalyst-like excitement to the market, but the bar for impressing investors is getting higher and higher, and there is good reason to worry about whether these companies can deliver on their promises," Pizzurro said.