Is Meta Platforms a Top Growth Stock Again?

When Meta Platforms (META 2.26%) was known as Facebook, it was one of the top growth stocks. Since its name change to Meta Platforms, signaling a shift in business focus, the company hasn't put up nearly the same results.

But after it reported second-quarter earnings, that sentiment may have shifted. Can investors call Meta Platforms a growth stock again? Or is it categorized as something different? Let's find out.

Revenue growth has returned

Despite its name change, 99% of revenue still comes from its family of apps: Facebook, Instagram, Messenger, WhatsApp, and now Threads. That revenue is mostly advertising related, which saw a rough patch in the latter half of 2022 when fears of a recession ran rampant.

But those fears disappeared as Meta's advertising revenue rose 12% in the second quarter. That is huge for investors, as many were worried that the company was in a downhill spiral last year by focusing too much on its Reality Labs division.

The Reality Labs division is still terrible. Revenue fell from $452 million last year to just $276 million. Although the segment's operating expenses have been reduced thanks to CEO Mark Zuckerberg's renewed focus on efficiency, they are still relatively high.

Reality Labs posted an operating loss margin of 13,547%, compared to 6,208% last year. Those are some of the worst margins I've ever seen, but fortunately, they only make up a small portion of the business.

Meta's overall operating margin was 29%, the same as the year-ago quarter. But it's notably better than the previous quarters.

Data source: Meta Platforms.

This trajectory is what investors love to see, and it gets them excited for the third quarter even as the second quarter was just reported.

Management gave third-quarter guidance of $33.3 billion in revenue at the midpoint, indicating an astounding 20% rise. But it also noted that Meta's expenses will increase again.

Efficiency was the focus for only a couple of quarters

At the onset of 2023, Zuckerberg declared it to be the "year of efficiency" for Meta. And when he said one year, he meant it. In its third-quarter outlook, Meta noted its infrastructure costs would be higher next year, along with higher payroll expenses as it shifts its focus into artificial intelligence (AI). While the company didn't provide any commentary on how much more it would spend, it's clear that it will be meaningful.

However, if the advertising market continues to improve, the increase could absorb the higher operating expenses. Many investors would rather see that capital returned to them, but AI investments could pay off over the long run.

So that raises the question: Is Meta a buy right now?

It is no longer the bargain-bin stock it was entering 2023 after rising over 160% this year. Now, it has returned to a valuation more on par with its historical levels (when its forward valuation is used).

META PE ratio data by YCharts; PE = price to earnings.

So with the stock being fairly priced, all stock appreciation must come from business performance. With Wall Street analysts expecting earnings to rise 26% in 2024, that indicates market-beating results.

If that kind of growth lies ahead, investors are safe adding the stock at these levels. Expectations must be kept in check because the stock is unlikely to return another 160% from these levels for some time. But with market-beating performance in its future, I'd say Meta Platforms has regained its title as a growth stock.