Meta Platforms (META -1.73%), formerly known as Facebook, has taken shareholders on quite the roller-coaster ride. After losing 64% of its value in 2022, it's up 150% in 2023. That puts it 10% below where it entered 2022, but with the average Wall Street price target of $380, analysts believe it will set a new all-time high within the next year.
A 25% upside may seem like a great return for investors. But I think Wall Street is wrong in this case. I actually think there is greater upside to Meta Platforms' stock.
Meta Platforms' Q3 was one for the books
Meta changed its name to convey to investors that it is much more than a social media company, but in reality it is still just a social media company with an expensive hobby. Its family of apps (Facebook, Instagram, Messenger, WhatsApp, and the recently launched Threads) is a fantastic business when advertising revenue is plentiful. But over the past year and a half, businesses have curtailed their advertising spending in preparation for a potential recession. While those fears aren't completely subdued yet, customers are feeling more optimistic and advertising revenue is on the rebound.
With the majority of Meta's revenue coming from advertising, this is great news, and the third quarter was fantastic as a result. In Q3, Meta's advertising revenue rose by 24% to $33.6 billion. The increased revenue also came with a better operating profit, with the advertising division's operating margin increasing from 34% to 52%.
That is an incredible result, but there is another side to Meta's business: its Reality Labs division. This encompasses Meta's virtual- and mixed-reality hardware, plus its investment in the metaverse. To say this division is a dumpster fire may be an understatement. Its revenue reached the lowest mark for any quarter investors have information on at $210 million. On the flip side, it spent $3.95 billion on the division, which is a disastrously poor operating loss margin of 1,881%.
While CEO Mark Zuckerberg has curtailed some of Reality Labs' spending in 2023 (the operating loss was the lowest in 2023 so far despite its lowest-ever revenue), it's still losing the company a lot of money. I'd prefer the company ax this division, but that isn't Zuckerberg's vision, so investors are stuck with it.
But the question is: Is the primary business good enough that the Reality Labs division can be ignored?
Based on the results in Q3, I'd say, "yes."
The stock is looking much cheaper with its recent results
Q3 wasn't just an outlier in terms of growth. For the fourth quarter, management expects revenue between $36.5 and $40 billion, indicating 22% growth at the midpoint. Should Meta keep up this 20% growth rate over the next three quarters while maintaining its current profit picture, that would produce $48.5 billion in profits. At Meta's current $771 billion market cap, that would value the stock at 16 times forward earnings.
That's a dirt-cheap price, and it reminds me of what happened last time Meta's stock was that cheap.
Meta was last priced this low at the beginning of 2023, ripping off an impressive run before stalling out in July. I wouldn't be surprised if it starts doing that again. But there's one item to keep an eye on.
Meta Platforms is currently being sued by a group of 42 state attorneys alleging that Facebook and Instagram use features that are addictive to kids. This issue has been alleged for a while, and the lawsuit is a culmination of those concerns. They seek to end these practices, but the long-term ramifications for Meta Platforms (besides a fine) are likely negligible.
I'm not concerned about this lawsuit and am excited about Meta's future, especially with advertising growth returning.
While I'm not a shareholder right now, I plan on becoming one shortly due to Meta's incredibly strong Q3 performance.
