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With a YTD gain of over 155%, Meta Platforms (META) is the best-performing FAANG stock of the year, and the second-best-performing S&P 500 Index ($SPX) stock. It’s been quite a turnaround for Meta, as the stock was the worst-performing FAANG stock in 2022, and lost almost two-thirds of its market cap.
One of the factors that drove the rally in Meta stock was its subdued valuations after last year’s crash. The stock has arguably seen a valuation reset, as is evidenced by the monstrous rally this year. However, I believe the stock still looks undervalued, especially for those to invest for the long term.
Notably, Meta stock has fallen only about 5% from its 2023 highs, which is the second-lowest among FAANG peers - behind only Alphabet (GOOG), which is still trading quite close to its 52-week highs. Even Apple (AAPL) - which most see as a pillar of stability during periods of economic turmoil, like we're in currently - has fallen in double digits from its 2023 highs.
Is Meta Platforms Stock Undervalued?
Meta Platforms currently trades at a next-12 months (NTM) price-to-earnings multiple of 19x. The multiples bottomed at 12.3x in November 2022 amid the slide in Meta stock. However, the multiple has averaged 21.4x over the last three years, and 22.2x over the last five years. Meta’s valuation multiples are also the lowest among FAANG peers, as has been the case historically.
On the face of it, Meta might appear somewhat undervalued. However, it would be prudent to put things into perspective.
First, Meta’s revenues are not growing at the same pace they did in the past. Analysts expect its sales to rise 13.6% and 12.4%, respectively, in 2023 and 2024. While that's still a big improvement from 2022, when its sales fell 1.1% - its first yearly fall in revenues – it's less than half of what the company was reporting before 2022.
Second, higher interest rates have taken a toll on the valuations of tech stocks, and Meta is no exception.
Meanwhile, though Meta’s revenue growth has slowed down, the company is trying to capitalize on several growth opportunities. I believe that despite having rallied sharply from its lows, Meta stock still looks like a decent buy. Here’s why:
1. Strong Social Media Platforms
While Meta Platforms' user growth has stagnated, Meta still has strong platforms with massive network effects. Also, while there is a global furor over targeted ads, and Apple iPhone privacy rules reduced Meta’s ability to show targeted ads to users, it is reportedly looking at an ad-free version in Europe - which would help bolster its revenues, while escaping the increasing regulatory heat in the region.
2. Effective Monetization to Drive Revenues
Meta is now looking at effective monetization of its platforms. During the Q2 2023 earnings call, it said that the annual revenue run rate of Reels – its short video format to compete with TikTok – is now at $10 billion, and has more than tripled over the last year. It is also looking at ways to increase the monetization of WhatsApp users, and has launched paid messaging and business messaging to help businesses connect with users.
Meta will also eventually monetize Threads – its X (formerly Twitter)-like platform – which will add a new line of revenue for the social media giant.
Increased monetization coupled with aggressive cost cuts should help drive the company's profits, with analysts projecting a 26% YoY rise in its 2024 net income.
3. Artificial Intelligence
Meta has started rolling out its generative AI tools to all advertisers. The company has also unveiled its Quest 3 headset, and the smart glasses that it co-developed with Ray-Ban’s parent company. Meta is among the top AI plays, as the use of generative AI will help it make the platform even better for users, while also making ads more effective from the perspective of advertisers.
4. Metaverse
Meta Platforms’ Reality Labs, which is building the metaverse, has been a cash guzzler - the segment lost $10.2 billion and $13.7 billion in 2021 and 2022, respectively. The company expects the segment’s losses to increase in 2023, and it has already reported an operating loss of $3.99 billion and $3.7 billion for Q1 and Q2, respectively – with the former representing the unit's highest quarterly loss so far.
However, Meta and its CEO Mark Zuckerberg are willing to lose that much money on building the metaverse for a reason, and management has been quite vocal about the segment’s centrality to Meta’s long-term success. While the Reality Labs segment is currently posting losses, it should eventually turn profitable if the bet plays out well.
I think of Meta as a mix of two businesses – while one is a value play on the legacy social media platforms, Reality Labs is the growth component that can add significant long-term value if the metaverse gains traction.
Meta Stock Forecast
Wall Street analysts are also quite bullish on Meta stock, and it has a consensus rating of Strong Buy. Of the 38 analysts that cover the stock, 34 rate it as a Strong Buy, while two rank it as a Moderate Buy. One analyst each rates it as a Hold and Strong Sell.
The stock’s mean target price of $361.65 is 16.8% above its current price.
The recent strength in Meta stock, despite the broad-based market sell-off, reiterates the fact that investors see value in this tech giant. The next key trigger for Meta will be the upcoming Q3 earnings report. The stock rallied smartly after the previous two earnings releases, and I don’t expect it to disappoint bulls this time either.
On the date of publication, Mohit Oberoi had a position in: AAPL , META . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
