Believe it or not, Meta Platforms' (META 3.61%) shares have risen an incredible 76% year to date. This trounces the S&P 500's 7.5% gain during this same period. With such an incredible start to the year, Meta's business must be firing on all cylinders, right?
That isn't exactly the case. Indeed, Meta reported a 4% year-over-year decline in fourth-quarter revenue, and the current consensus analyst is calling for another decline in Q1 (we'll find out on Wednesday whether this is how the quarter fared). So why has the stock risen so sharply despite such lackluster business performance?
The stock's huge run-up in 2023 is largely due to two things: a cheap valuation at the start of the year and the Facebook parent company's aggressive cost-cutting -- an effort investors are betting will bolster profits.
Two major catalysts
Looking at the first reason for Meta stock's gain, shares started the year with a price-to-earnings ratio of about 10 -- a ratio investors typically assign to a company from which they don't expect meaningful growth over the long haul. This is a shockingly low valuation, given that analysts expect double-digit growth in annualized earnings per share from the company over the next five years.
The stock's recent surge has brought shares to a valuation more aligned with analysts' expectations for earnings growth. In other words, you could argue that shares have course-corrected to a more rational valuation. Meta shares currently trade at 25 times trailing-12-month earnings and 22 times forward earnings.
The second big reason for Meta's gain this year is the tech stock's cost-cutting efforts. Meta CEO Mark Zuckerberg has said his management theme for 2023 includes calling it the "year of efficiency." "We closed last year with some difficult layoffs and restructuring some teams," explained Zuckerberg in the company's fourth-quarter earnings call. "When we did this, I said clearly that this was the beginning of our focus on efficiency and not the end."
Cost cuts in late 2022 and early 2023 will likely drive significant earnings growth throughout the year, helping support the stock's current valuation.
One big caveat
While we are dissecting what are likely the main reasons for the stock's soaring price this year, it's also worth noting that the stock has still been a terrible performer since 2021. Shares are down 44% from their all-time highs achieved in September of 2021, and they're down 37% from the end of 2021. That's compared to a 13% decline for the S&P 500 since the end of 2021.
There's a good reason shares have not fully recovered: Meta's business is not out of the woods yet. There's still significant uncertainty about the company's long-term margin profile and even its durability. Volatility in the social media company's cost structure over the last five years makes understanding how profits will trend over the long term a difficult task.
Further, the significant negative impact Apple's ad tracking and measurement changes had on Meta's business in recent years highlighted how reliant the company's apps are on distribution partners. Can Meta's business avoid disruptions like this in the future?
Sure, a higher stock price is a big win for Meta shareholders in 2023. But it also raises the stakes for the company to execute exceptionally well from here. Despite the stock's surging price recently, there's no guarantee that the levels the stock traded at in 2021 are on the horizon yet.
Investors should look to see whether management can provide shareholders with greater visibility about the company's long-term margin profile and the resilience of its business when Meta reports first-quarter results on Wednesday, April 26.