Meta Platforms (META -0.70%) had a rough 2022. Rising interest rates, a poor ad market, and increased competition forced the company to lay off thousands of employees; the stock price plummeted 64%.

But in 2023, Meta is on the rebound. The company's stock price is up 163% since Jan. 1, and it is reporting strong financial results.

The company made significant changes to its business, including churning out many new products and services like Threads, an app similar to Twitter (recently renamed X), and Reels, a promising short-form video platform. The improvements made by the company over the last year have not gone unnoticed by bullish investors, who eagerly anticipate the positive impact on the company's bottom line. Overall, there is a sense of optimism surrounding the company's trajectory.

Although some might think the market overvalues the company after the stock's rapid rise over the year's first half, you should consider buying a few shares. Here's why.

Recent results are fantastic

The good news is that Meta's second-quarter 2023 results are in, and the company is back on track after a terrible 2022 with an impressive $32 billion in revenue, beating analysts' estimates. Some believe Meta's prime source of income, the ad market, is starting to recover and is responsible for the company's return to double-digit revenue growth. If true, much brighter days are ahead.

META Revenue (Quarterly YoY Growth) Chart

META Revenue (Quarterly YoY Growth) data by YCharts

Management has also been working hard to increase productivity and boost profits.

During the company's fourth-quarter earnings report on Feb. 1, CEO Mark Zuckerberg announced a plan to reduce operating costs and spend less on long-term assets like buildings and equipment. Zuckerberg also wants to speed up decision-making by removing some middle management, so the company can react faster in a rapidly moving market. Lastly, he wants to use artificial intelligence (AI) to help produce more products and services using fewer people. This plan is called the "Year of Efficiency."

If the "Year of Efficiency" succeeds, the company generates more revenue while spending less. We can determine if the efficiency measures are effective by analyzing the total operating expenses as a percentage of revenue. As operating efficiency improves, the total operating expenses as a percentage of revenue should decrease, leading to an increase in operating margin, as shown in the chart.

META Total Operating Expenses (% of Quarterly Revenues) Chart

META Total Operating Expenses (% of Quarterly Revenues) data by YCharts

Additionally, it would be wise to watch the company's free cash flow. A sign that Zuckerberg is following through on his commitment to reducing spending on long-term assets is that free cash flow (FCF) should rise. Since the fall of 2022, quarterly FCF has increased from $316 million to $11.09 billion. 

META Free Cash Flow (Quarterly) Chart

META Free Cash Flow (Quarterly) data by YCharts

If the company's revenue growth, profitability, and FCF have demonstrated signs of rebounding, why are some lukewarm on the stock?

Competition is fierce

The more users who engage with Meta's numerous social media platforms, the likelier they are to see and interact with ads, leading to increased brand awareness, consideration, and sales for advertisers. Therefore, Meta must work hard to maintain user engagement on its platforms to maintain its ad unit's success.

In recent years, there has been an explosion of new and exciting technologies based on social networks. Platforms like TikTok, Snap, and Roblox have become increasingly popular among millennials and Generation Z users. As a result, when younger generations spend more time engaging on alternative platforms, user engagement on apps like Facebook drops, reducing the effectiveness of its ad platform.

Some of the reason for Meta's stock decline last year was that its user engagement numbers tanked, and its ad business suffered. Although things look to be turning around, some fear competitors can still disrupt the company's ad business.

It uses AI to differentiate from competitors

The good news is that management plans on maintaining its relevance with users and advertisers by utilizing its many advantages in AI. Meta is one of the most advanced AI companies in the world. It has invested heavily in AI research and development and has many AI-powered products and services.

Here are some of the ways it leverages AI technology to differentiate its services from competitors:

  1. It enhances the user experience by recommending personalized, relevant content like news, videos, and stories.
  2. AI will power upcoming features like chatbots, virtual assistants, and real-time translation, facilitating communication and interaction between users and businesses.
  3. It uses AI to improve advertising performance by helping advertisers build ads, target the right audience, optimize ad creatives, measure ad effectiveness, and automate ad delivery.
  4. The company conducts fundamental and applied research in AI, particularly in generative AI, computer vision, natural language processing, and infrastructure. It also shares its frameworks, libraries, demos, models, and tools with the open-source community and collaborates with other researchers and developers.
  5. The company utilizes AI to create immersive, realistic experiences in virtual and augmented reality, enabling the company to generate content, characters, environments, and interactions that are dynamic and responsive to user input.

Many of Meta's current and future competitors will likely struggle to keep up with its AI innovations.

Why you should consider putting it on your buy list

First, the stock has a price/earnings-to-growth (PEG) ratio of 0.948. Most people consider a PEG ratio under 1.0 as a sign that the market is undervaluing a company.

META PEG Ratio Chart

META PEG Ratio data by YCharts

Additionally, Meta is a significant player in social media, with a large user base across its apps. It's also a leader in innovation and investing in cutting-edge technology, such as Oculus VR and Portal smart devices. The company has diverse revenue streams and is growing its nonadvertising businesses, such as e-commerce, payments, gaming, and cloud services.

All this means growth investors looking for a solid investment in the coming bull market should strongly consider the company.