META Platforms stock (NASDAQ: META) has witnessed a substantial increase, spurred by investor enthusiasm over rising user interaction and consistently robust quarterly earnings. So far this year, Meta has gained 16%, significantly outperforming the wider NASDAQ index, which has increased by 2%.
Examining a slightly extended timeframe, Meta’s outperformance is even more pronounced. Since the beginning of 2024, Meta’s stock has achieved a striking 97% return, rising from about $350 to roughly $700 per share. In comparison, the NASDAQ index recorded a 31% increase during the same timeframe.
The remarkable 97% increase in Meta’s stock can be linked to three primary factors:
- a 54% increase in its Price-to-Sales (P/S) ratio, rising from 6.9x in 2023 to 10.6x presently;
- a 26% growth in the company’s revenues, escalating from $135 billion to $170 billion in this timeframe; and
- a slight 1% decrease in total shares outstanding, bringing the total to 2.6 billion.
We will explore the details of these factors. While META stock has had a positive trajectory, if you seek an upside with a steadier experience than an individual stock, consider the High Quality portfolio, which has surpassed the S&P and recorded >91% returns since inception. Additionally, see – Is Oracle Stock A Buy At $190?
What’s Driving Meta’s Revenue Growth?
Meta Platforms stands as the world’s leading social network that connects individuals with friends and family. The company generates revenue mainly through advertising, which it offers to marketers by targeting specific demographics based on information shared by users on its platforms.
Meta Platforms’ revenue growth recently can be credited to an increase in ad impressions as well as a rise in the average price per ad. Additionally, Meta’s family daily active users (DAP) has grown by 7.5% from 3.19 billion in 2021 to 3.43 billion now. The company benefits from its AI initiatives aimed at enhancing advertising. It also intends to leverage AI for generating more content.
Not only has the company’s sales improved in the past three years, but its net income margin has expanded from 29% in 2023 to 39% currently. Meta’s outstanding shares have also decreased by 1% over this timeframe, largely due to the $63 billion the company invested in share buybacks since 2023. The rise in revenues combined with margin expansion and fewer shares has resulted in the company’s net profit of $25.58 now, an increase of 72% from $14.87 in 2023.
What’s Behind Rising Valuation Multiple?
Investors are increasingly optimistic about Meta’s stock, and rightly so. The company is experiencing a healthy increase in both ad impressions and the average price per ad, which directly enhances its sales.
A significant factor driving this optimism is Meta’s proactive investment in AI. This is not merely a trendy term for Meta; AI is significantly contributing to heightened advertising revenues by:
- Enhancing user engagement across its platforms.
- Facilitating more precise ad targeting, which means advertisers achieve better outcomes and are willing to invest more.
- Improving overall ad effectiveness, leading to greater revenue per user and higher conversion rates for businesses running advertising campaigns. This is vital, as advertising constitutes the bulk of Meta’s income.
Meta is deeply incorporating generative AI throughout its entire social media ecosystem. This includes innovative features such as the Meta AI virtual assistant for chat, advanced image generation, and robust photo editing tools. Moreover, its Llama AI model is quickly gaining a substantial user base, further solidifying its leadership in AI. These potent growth drivers, coupled with Meta’s improving profitability—evidenced by a solid 39% net income margin—have significantly enhanced investor confidence. Consequently, the company’s Price-to-Sales (P/S) ratio has notably expanded from 6.9x trailing revenues in 2023 to 10.6x currently.
But Does META Stock Have Any Room For Growth?
Indeed, META stock has performed well since the start of 2024. Nonetheless, the rise in META stock has not been steady. The stock’s returns were 23% in 2021, -64% in 2022, 194% in 2023, and 66% in 2024. In contrast, returns for the S&P 500 were 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 — suggesting that META underperformed the S&P in 2021 and 2022.
Conversely, the Trefis High Quality (HQ) Portfolio, featuring a selection of 30 stocks, has successfully outperformed the S&P 500 over the last four years. What accounts for this? Collectively, HQ Portfolio stocks have yielded better returns with lower risk compared to the benchmark index; offering a smoother ride, as shown in HQ Portfolio performance metrics.
Considering the current uncertain macroeconomic environment characterized by trade disputes, interest rate adjustments, and geopolitical tensions, could META find itself in a situation similar to that of 2021 and 2022, potentially underperforming the S&P over the next twelve months — or will it experience a strong upturn?
From a valuation perspective, we believe that Meta’s stock is currently fully valued. Our evaluation places Meta Platforms’ valuation at $702 per share, which is quite close to its current market price. The stock is currently trading at 10.6 times its trailing revenues, noticeably higher than its four-year average Price-to-Sales (P/S) ratio of 6.8x.
While a slight increase in Meta’s valuation multiple appears reasonable given its recent strong advertising growth, investors should also take into account the inherent risks. The exact impact that AI will have on the company’s long-term earnings growth remains uncertain. This uncertainty renders Meta’s ongoing, aggressive investments in AI a potential risk factor. For context, Meta has already invested $77 billion in capital expenditures since 2023, and it intends to allocate an additional $64 to $72 billion this year alone for AI infrastructure.
While META stock seems fully valued, it is useful to examine how Meta Platform’s peers perform on important metrics. You can discover other valuable comparisons for companies across various industries at Peer Comparisons.
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