Should You Invest in Meta Platforms Stock Now?

Meta Platforms delivered results that surpassed Wall Street’s projections once more.

On July 26, following the announcement of its Q2 performance, Meta Platforms’ stock experienced a 7% surge during post-market trading. The company witnessed an 11% YoY growth in revenue, reaching $32 billion, exceeding the predicted figures by $970 million. Additionally, its EPS witnessed a 21% hike, reaching $2.98, and surpassing the general forecast by $0.07.

While Meta’s financial results were commendable, is there still potential for the stock given its impressive 150% growth so far this year? Let’s delve into Meta’s past obstacles, its recent resurgence, and its valuation to determine if it’s a worthy investment.

Why was Meta Out of Favor Last Year?

Three significant issues led to a steep decline in Meta’s stock, reaching a seven-year trough last November:

1. The heart of its revenue source – the advertising sector (accounting for 97% of its 2022 revenue) – faced setbacks. These stemmed from the broader challenges in the digital advertising world, competition from TikTok owned by ByteDance, and Apple’s alterations to iOS privacy. As a result, Meta’s revenue dipped by 1% in 2022 from a remarkable 37% growth the previous year, leading many to believe that its rapid growth era had concluded.
2. A drop in Meta’s operating margin from 40% in 2021 to 25% in 2022 occurred due to its expansion into the Reality Labs segment, focusing on VR and AR technologies. This division reported an operating loss of $13.7 billion in 2022 against the company’s total operating income of $28.9 billion, all while bringing in a revenue of just $2.2 billion. Despite layoffs to reduce costs, Meta persisted in bolstering Reality Labs.
3. Increasing interest rates prompted a mass exodus from tech stocks, with Meta being easy prey due to its slowing growth.

Meta’s Road to Recovery

After a three-quarter decline, Meta’s advertising revenue bounced back, registering a 4% increase in Q1 2023. By Q2, the figure had risen to 12% YoY. This resurgence dispels concerns regarding the company’s dwindling ad business.

The resurgence was partly attributed to hefty ad purchases from Chinese online platforms aiming to engage international customers. These might include Pinduoduo’s Temu, Alibaba’s AliExpress, and Shein.

Moreover, ad impressions across Meta’s platforms surged by 34% YoY in Q2, counteracting a 16% dip in the average ad price. Such trends mirror the Q1 dynamics, where a 26% boost in total ad impressions balanced a 17% drop in average ad rates.

The continuous expansion of its user base allows Meta to showcase more ads. Its suite of applications (Facebook, Messenger, Instagram, and WhatsApp) registered 3.88 billion monthly users in the recent quarter, marking a 6% YoY growth. Notably, Facebook’s user count grew by 3%.

This consistent growth underscores Meta’s continued dominance in the ad space, even as competitors like TikTok vie for younger audiences. Notably, Meta’s Reels has already reported an annual revenue rate of over $10 billion, a substantial leap from $3 billion the previous year.

CEO Mark Zuckerberg expressed a positive outlook for Threads, Meta’s new Twitter-esque platform. Although it amassed almost 100 million users within three days of its launch, Zuckerberg acknowledged the platform’s ongoing developmental phases.

To counter Apple’s platform changes, Meta introduced AI-powered ad suggestions, which Zuckerberg attributes to a 7% uptick in user engagement.

However, Reality Labs witnessed a 39% YoY revenue slump to $276 million due to reduced Quest 2 headset sales. Yet, its operating losses broadened from $2.8 billion to $3.7 billion.

On a brighter note, with cost-saving initiatives and the revival of its lucrative ad business, Meta’s overall operating margin remained stable YoY at 29%. The company also made adjustments to its yearly capital expenditure forecast.

The Final Takeaway

For Q3, Meta projects its revenue to grow between 15% and 24% YoY, hinting at a conclusion to its downturn phase. Current valuations suggest that the stock, priced at 25 times its projected earnings for the year, offers reasonable value. Thus, investing in this enduring FAANG stock may still be a wise decision.

In the ever-evolving landscape of tech stocks, Meta Platforms stands out as a beacon of resilience. Its ability to navigate challenges, innovate, and sustain growth makes it a compelling contender for investors seeking both stability and growth. As the digital world continues to expand, Meta’s integrated ecosystem and its ambitious forays into new frontiers position it well for the future. Investors would be wise to consider its potential amidst the broader tapestry of tech investments.