Meta Platforms (META -0.52%) has been one of the best-performing stocks this year. Shares are up 167% in 2023 (as of Oct. 1), a huge reversal from the monumental drop from late 2021 to late 2022. In November 2022, shares were trading at a beaten-down price-to-earnings (P/E) ratio of below 9. This looks like an absolute steal in hindsight.
Like its big tech peers, this business is benefiting tremendously from renewed investor interest. But is this top social media stock a smart buy right now? Let's take a closer look.
An incredibly lucrative segment
By owning four incredibly popular social media services -- Facebook, Instagram, WhatsApp, and Messenger -- Meta commands user attention like no other. As of the most recent quarter (ended June 30), the company reported having 3.07 billion daily active users on its platform. This means that 38% of the global population interacts with a Meta product on a day-to-day basis. That scale is truly remarkable.
The result is an incredibly lucrative digital ad business. Meta holds the second-place position behind Alphabet in the digital advertising market, both in the U.S. and on a global level. Segment revenue of $31.7 billion last quarter was up 11.8% year over year, an improvement from the past few quarters despite ongoing macro headwinds. And this segment is very profitable, posting an operating margin of 41%.
It's hard to understate the dominant position Meta has through facilitating human interaction and connection. And this has resulted in sizable cash profits over the years, which we have no reason to believe won't continue.
AI push
The business made headlines when Mark Zuckerberg changed the company's name and refocused the strategy around the metaverse, which consists of virtual worlds where humans can interact with each other in new ways. Since the start of 2022, the so-called Reality Labs division has generated a cumulative operating loss of more than $21 billion. Of course, investors are wondering if this strategy will even pay off.
But while the metaverse ambitions have cost a lot of money thus far with no tangible results to show for it, Meta is positioning itself to be a leader in the age of artificial intelligence (AI). On the consumer side, AI will help people find new ways to connect with each other, as well as provide chat assistants and improve image editing. And for the businesses that use Meta's advertising capabilities, a new suite of tools called Advantage+ can improve targeting and drive efficient marketing spending.
Why wouldn't a company that has billions of users and the capabilities to collect so much data not be at the forefront of AI innovations? Meta is in a prime position to benefit as this new technology becomes even more prevalent in our society. And this could provide greater financial upside when it comes to revenue and earnings potential.
Meta's valuation is attractive
Even after shares have catapulted higher this year, they don't appear to be expensive. Right now, they trade at a forward P/E ratio of 24.2. For comparison's sake, the average company in the Nasdaq 100 Index sells at a multiple of 26.1. And between the other major tech companies, including Alphabet, Apple, Amazon, and Microsoft, Meta is the cheapest when it comes to the forward P/E ratio.
The business is expected to increase revenue by 11% and diluted earnings per share by 23.7% on an annualized basis between 2022 and 2027, according to consensus analyst estimates. Those would be outstanding growth rates, making the current valuation very attractive.
Even if the metaverse push ends up being a big waste of time and money, the company's dominance in social media and digital advertising justifies starting a position in the stock.
