Shares of Meta Platforms (META -0.57%) have been on an absolute tear this year. The stock has surged 77% as of this writing. Even more, the stock is up more than 140% from a low point last November. With such incredible momentum in the stock price, I risk taking some heat for exploring whether it could be time to take some profit off of the table. With such a spectacular gain in the rear-view mirror, it's fair to say that sentiment around the tech stock is likely quite rosy.
But it's when exuberance dominates that it often makes the most sense to play devil's advocate, exploring whether it may be a good time to sell. So, does it make sense to sell some shares of Meta after such a big run-up in the stock price?
The valuation hasn't become irrational
Despite Meta stock's big move higher, the stock still isn't commanding a frothy valuation. For instance, the stock has a price-to-earnings ratio of 24. While this is ahead of the average price-to-earnings multiple of 18 of stocks in the S&P 500 index, Meta is well positioned for strong earnings growth in the years to come.
There are actually a wide range of reasons to expect earnings growth from Meta in the coming years, from further monetization of its popular Reels browsing format to a potential economic recovery. But we'll focus on three specific catalysts in this article.
First, Meta has been aggressively cutting costs. Layoffs will likely provide a meaningful boost to earnings. In addition, they may spur the company to operate with a leaner model going forward, boosting profits.
Second, Meta's business is still recovering from some signal loss in its ad tracking and measurement abilities. Apple introduced privacy features in 2021 that derailed Meta's ability to track advertisements on the platform and provide performance data to advertisers. But Meta has been rebuilding its tracking and measurement tools so that they are fully adapted to this new environment.
Third, an economic recovery at some point during the next five years could be a boon for Meta. Uncertain environments like the one we are in now constrain advertiser budgets and ultimately hurt revenue. When visibility for businesses improves and interest rates stabilize (or even start coming down), advertisers will likely begin spending more again.
All of this is to say that Meta stock certainly doesn't look expensive. A price-to-earnings ratio of 24 for a company likely to see robust earnings growth over the next five years is reasonable.
One reason to be cautious
But to play the role of devil's advocate, the huge revenue setback Meta endured from Apple's changes in privacy procedures exposed how vulnerable tech platforms like Meta are to disruption. For this reason, Meta likely doesn't deserve the price-to-earnings ratio in the 30s that it frequently commanded in the past. While the company looks like a good investment today, the uncertainty level behind that assessment is high. For this reason, investors may want to limit buying a stock like Meta unless they believe they are buying shares at a significant discount to their estimate of the stock's intrinsic value. This could help mitigate some of the risks of additional unexpected technological disruptions.
So, is Meta Platforms stock: buy, sell, or hold? I would say it's a hold. Yet with such a sharp run-up in the rear-view mirror, it could make some sense to take some risk off the table and sell a portion of any position in Meta, moving the capital to a less risky investment.
