With gains of 110% so far, Meta Platforms (META -4.13%) has been one of the tech sector's best-performing stocks this year. In addition to investors generally warming back up to companies with growth-dependent valuations, the social media giant's valuation has also benefited from better-than-expected earnings results and excitement surrounding its artificial intelligence (AI) initiatives.
But after such explosive gains in a relatively short period of time, is Meta stock still a worthwhile investment? If you're considering investing in the social media giant, read on for a look at positive and negative factors that could shape its performance.
These risk factors could derail Meta's run...
Digital advertising companies are already facing macroeconomic headwinds, and many economists and stock market analysts now expect that the U.S. economy will enter into an official recession this year or next. Meta managed to increase revenue roughly 3% year over year in the first quarter, reaching more than $28.6 billion in sales, but it's possible that industry conditions will make it harder to grow.
The digital ads market tends to be highly sensitive to worsening economic conditions, and a shift into recession could hurt Meta's core businesses. While the tech giant has become a more efficient operation through large-scale layoffs and other initiatives, the company's costly investments in the metaverse will continue to be a drag on profitability, and it depends on the ads industry to drive earnings.
Additionally, it's still possible that inflation will continue to run hot despite recent signs the issue is moderating. If so, that would likely prompt the Federal Reserve to continue raising interest rates, which would be bad news for growth stocks including Meta.
But Meta stock still has a lot going for it
Even with net income falling 24% year over year in the first quarter, Meta still managed to post a profit of $5.7 billion. Despite headwinds, the company continues to be immensely profitable, and it's showing it can respond flexibly to challenges.
META PE Ratio (Forward) data by YCharts
With the stock currently valued at less than 22 times this year's expected earnings and roughly 14 times next year's expected profit, shares still look non-prohibitively valued. Even if recession winds up tamping down the company's profitability in the near term, Meta should be able to get back to posting stronger performance when the broader digital ads market eventually regains strength, and its core social media businesses continue to look pretty strong.
With total daily active users across Facebook, Instagram, WhatsApp, and other platforms rising 5% year over year to reach 3.02 billion in the first quarter, Meta remains the undisputed leader in the social media space.
Opportunities in AI and the metaverse
With its strong technology resources and access to an incredible array of valuable data, Meta Platforms could be one of the big winners in the artificial intelligence revolution. The company is already implementing and developing new AI-powered tools to improve content feeds and ad targeting on its Facebook and Instagram platforms, and it also appears to be gearing up to launch virtual assistants and support agents to regular users and businesses. Artificial intelligence also has the potential to be a huge efficiency driver for the company, opening the door for significant margin improvements.
And while AI is positioned to be a near-term performance catalyst, the company still has promising opportunities in the metaverse. Alphabet and Apple dominate mobile operating systems, and Meta depends on their platforms for most of its business.
As already demonstrated by the impact of Apple's user-privacy changes, Meta's business can be highly susceptible to adverse policy shifts made by platform holders. If the company can score wins with its metaverse strategy, it can start to get out from under the thumbs of Apple and Alphabet -- and potentially capitalize on a revolutionary technology shift.
It's not too late to invest in Meta Platforms
Even after its incredible rally this year, Meta Platforms stock still trades down roughly 35% from its high. The company is proving it can effectively manage costs when it needs to, its core social-media and communications platforms continue to post impressive levels of engagement, and investments in emerging tech trends could have bigger payoffs than the market currently anticipates. Meta shares are no longer the absolute steal they were at the beginning of the year, but they still trade at levels that leave room for long-term investors to see strong returns.
