Is Meta Platforms Stock a Buy?

It may be a great social media business, but its stock might be risky to investors.

Investors in Meta Platforms (META -2.41%) had a great time over the last 12 months, when the stock returned a mind-blowing 150%. But with the company joining Apple and Microsoft at the $1 trillion-plus market capitalization level, investors might wonder if the stock is still a buy in 2024.

Man using VR headsets.

Image source: Getty Images.

A resilient advertising business

The last few years have been a roller-coaster ride for Meta’s core advertising business.

It started with a huge boom due to the COVID-19 pandemic, which drove the demand for digital services (including digital advertising) through the roof, lifting most technology companies. Meta’s advertising business reported solid revenue growth of 21% and 36% in 2020 and 2021.

However, the boom didn’t last long. The reopening of global economies and a series of issues — among them, Apple’s privacy policy enhancements and competition from video company TikTok — dragged on Meta’s results in 2022. That year, revenue fell by 1% while operating income shrank by 25%. Investors accustomed to Meta’s historical growth rates were shocked.

Fortunately, the downturn was temporary, and Meta’s “Family of Apps” business was back on track in 2023. Full-year revenue grew 16%, while operating income jumped 47% — in part due to cost-cutting activities. The fourth quarter’s revenue and operating profit jumped by 24% and 97% year over year, respectively.

In many ways, Meta’s solid performance in 2023 demonstrated the resilience of its business model. For example, despite being the most prominent social media networking company, it still managed to grow its daily active users by 8% in 2023 to 3.19 billion and monthly active users by 6% to 3.98 billion — touching roughly half of the global population of around 8 billion.

With its extensive reach, Meta — and its different platforms, including Facebook, WhatsApp, Instagram, and Messenger — is the go-to advertising service for any business, small or large. For instance, Temu, the up-and-coming e-commerce platform, spent nearly $2 billion in 2023 on Meta platforms to acquire users.

So long as Meta can sustain and grow its user base (and engagement) over time, it will continue to be one of the most attractive digital advertising platforms on the planet.

Pouring out money to build a metaverse

While investors may no longer be concerned about Meta’s ability to rekindle growth in its advertising business, their worries about its metaverse division, Reality Labs, remain intact.

After incurring a $13.7 billion operating loss in 2022, this division burned another $16.1 billion in 2023. Even more uncomfortable for investors is that the division’s revenues declined by 12% in 2023 en route to that 18% larger operating loss.

On the one hand, Meta’s heavy (and ongoing) investment in the metaverse seems rational as it tries to build what it hopes will be the next big platform for social interaction and experiences — one where physical boundaries disappear, and anyone can connect from anywhere globally and interact in the same virtual spaces. According to Statista, the Metaverse industry could reach $508 billion by 2030, indicating the possibility of substantial financial rewards for the winners. So, it looks logical for Meta to spend billions of dollars trying to capture a piece of this opportunity.

Still, given this industry is nascent, plenty of risks and uncertainties are ahead. For instance, we can’t know how long it will take for the metaverse to reach the mainstream — or if it will. It might never gain much traction. Given the rapid pace of technological change, the emergence of new hardware and software, and the uncertainty around regulations and business models, investors question whether Meta’s early entry into this industry will give it an edge in the long run.

However, since Meta has fully committed to building its metaverse, investors must accept the ongoing siphoning of profits from its cash-cow advertising business to fund the venture.

What about Meta’s valuation?

Finally, nobody should make an investment decision on a stock until they consider its valuation.

As of this writing, Meta’s stock trades at a price-to-earnings (P/E) ratio of 26, which is in-tune with its five-year average. For comparison, another leading digital advertiser, Alphabet, has a P/E ratio of 29.

So, buying Meta’s stock today won’t necessarily require investors to pay a massive premium. But it still gives investors only a small margin for error.

Is Meta stock a buy?

The investment thesis for Meta remains a mixed bag.

On the positive side, the company demonstrated in 2023 that its advertising business — while already gigantic — could continue growing thanks to its extensive global reach.

The downside, however, is that the company’s metaverse efforts remain expensive, and whether they will ever pay off for shareholders is still uncertain. What is certain is that Reality Labs will still need massive cash infusions from the Family of Apps business for the foreseeable future.

Besides, the stock’s valuation is not cheap, making it a hold at best for existing investors. For those who don’t already have Meta in their portfolios, however, it would be prudent to stay away from the stock for now.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, JPMorgan Chase, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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