In a remarkable turn of events, Meta Platforms (NASDAQ:META) has emerged as the top-performing FAANG stock of the year, with a year-to-date gain of over 155%. This performance also ranks it as the second-best performer in the S&P 500 Index ($SPX). This resurgence is particularly noteworthy as Meta was the worst-performing FAANG stock in 2022, shedding almost two-thirds of its market capitalization.
One of the key drivers behind Meta’s recent rally was its subdued valuation following the crash last year. The stock has arguably experienced a reset in valuation, evident from its extraordinary rally this year. However, there’s a compelling case to be made that the stock remains undervalued, particularly for long-term investors.
Interestingly, Meta stock has only retraced approximately 5% from its 2023 peak, which is the second-lowest decline among FAANG peers, trailing only Alphabet (GOOG), which continues to trade near its 52-week highs. Even Apple (AAPL), often considered a stalwart during economic uncertainties, has witnessed a double-digit decline from its 2023 highs.
Is Meta Platforms Stock Undervalued?
As it stands, Meta Platforms is currently trading at a next-12 months (NTM) price-to-earnings (P/E) multiple of 19x. While this multiple reached a low of 12.3x in November 2022 during Meta’s slump, it has historically averaged 21.4x over the past three years and 22.2x over the last five years. Meta’s valuation multiples are also the lowest among its FAANG counterparts, as has been the norm.
At first glance, Meta may appear somewhat undervalued. However, it’s essential to maintain perspective. First, Meta’s revenue growth is not as robust as it once was. Analysts project sales to increase by 13.6% in 2023 and 12.4% in 2024, which, although an improvement from the 2022 decline of 1.1%, represents less than half of the growth the company achieved before 2022.
Second, the impact of higher interest rates has weighed on the valuations of tech stocks, and Meta is not immune to these effects.
Nevertheless, despite the deceleration in revenue growth, Meta is actively pursuing multiple growth avenues. This is why, even after a substantial rally from its lows, Meta stock still presents an attractive investment opportunity. Here’s why:
Strong Social Media Platforms
Meta Platforms retains robust platforms with extensive network effects, despite stagnant user growth. Furthermore, amid global concerns about targeted ads and privacy regulations, Meta is exploring an ad-free version tailored for Europe. This move could bolster revenues while navigating increased regulatory scrutiny.
Effective Monetization Strategy
Meta is now focused on effectively monetizing its platforms. During the Q2 2023 earnings call, the company reported an annual revenue run rate of $10 billion for Reels, its short video format competing with TikTok. This figure more than tripled over the past year. Additionally, Meta is exploring ways to enhance monetization for WhatsApp users and has introduced paid messaging and business messaging to facilitate business-user interactions. The upcoming monetization of Threads, its Twitter-like platform, is expected to introduce a new revenue stream. Increased monetization, coupled with aggressive cost-cutting, is anticipated to drive a 26% year-over-year rise in the company’s 2024 net income.
Embracing Artificial Intelligence
Meta is rolling out its generative AI tools to advertisers, enhancing the platform’s user experience and making ads more effective.
Metaverse As a Growth Driver
Meta Platforms’ Reality Labs, responsible for building the metaverse, has incurred substantial losses, with $10.2 billion and $13.7 billion in losses in 2021 and 2022, respectively. These losses are expected to increase in 2023. However, Meta’s commitment to the metaverse, despite these losses, underscores its significance for the company’s long-term success. While the Reality Labs segment currently posts losses, it could eventually become profitable if the metaverse strategy unfolds as planned. Meta is essentially a blend of two businesses: one centered on the value of legacy social media platforms and another focused on the growth potential of the metaverse, which could deliver substantial long-term value if successful.
Meta Stock Forecast
Wall Street analysts share a bullish outlook on Meta stock, giving it a consensus “Strong Buy” rating. Out of the 38 analysts covering the stock, 34 rates it as a “Strong Buy,” while two rate it as a “Moderate Buy.” There is one “Hold” and one “Strong Sell” rating. The mean target price of $361.65 represents a 16.8% upside from the current price.
Meta’s recent resilience, even in the face of broader market downturns, underscores investors’ recognition of its value. The upcoming Q3 earnings report may serve as the next key catalyst for Meta stock. Given the stock’s strong performance after previous earnings releases, it’s poised to maintain its momentum. Investors can reasonably expect continued positive surprises from this tech giant.
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