2023 has been one for the books for Meta Platforms (META -0.28%) investors. The stock has risen around 180% so far in 2023, thanks to a sentiment shift by CEO Mark Zuckerberg. With his focus on efficiency, the company has made incredible gains.
While he has certainly made good on his promises that 2023 will be the year of efficiency, Meta's business is also starting to turn around. With two massive tailwinds blowing in Meta's favor, is it a must-own stock? Let's find out.
Meta's latest quarter shows its potential
Most people know Meta by its former name, Facebook. The name change occurred in late 2021 to signal investors about its focus on investing in the metaverse. And "invest" it has.
In its pursuit to develop the hardware and software required for the metaverse, Meta has burnt billions of dollars to execute its vision. Over the past two years, Meta has lost $31.1 billion on its Reality Labs division while only generating $4 billion in revenue. That's a terrible return on investment, and it's only gotten worse. In the third quarter, Reality Labs only generated $210 million in revenue -- the lowest over the past two years. While expenses have declined from their fourth-quarter 2022 highs, they were still up slightly from last year's Q3.
But that's the bad with Meta Platforms. If you can ignore it (even though I wish the company would cut the division altogether), the other side of the business is quite strong.
Meta's family of apps (which includes Facebook, Messenger, WhatsApp, Instagram, and Threads) continues to be the company's breadwinner. This division brought in an incredible $33.9 billion during Q3, up 24% year over year. It also generated an impressive $17.5 billion in operating income, more than offsetting the losses sustained from Reality Labs.
Despite the drag from Reality Labs, Meta posted one of its highest operating margins in recent quarters.
META Operating Margin (Quarterly) data by YCharts
This bodes well for a company that's just starting to see advertising revenue pick up. Furthermore, Wall Street expects 13% growth next year from Meta, so its strength should continue.
However, when a stock nearly triples in a year, investors must consider how valuation affects the investment thesis.
The stock still looks like a buy at these levels
Meta Platforms entered 2023 at an absurd valuation. Although the economic outlook wasn't particularly rosy heading into 2023, 11.5 times earnings is just too low a price for a company that can produce jaw-dropping profits when it wants to.
META PE Ratio data by YCharts
After a year of efficiency improvements, growth, and strong stock performance, the stock now trades around 30 times earnings. This level is probably reasonable for Meta, but it doesn't paint the full picture.
The previous three quarters of Meta's results have included sub-par operating margins, which have been fixed through Zuckerberg's efficiency efforts. The price-to-earnings (P/E) ratio uses the past 12 months' earnings in its calculation, ignoring the vast improvements that will be made over the next three.
If Meta continues to post a 40% operating profit (combined with a 20% tax rate) and grow its revenues by 13% (like Wall Street expects), its forward P/E ratio would be 19. This analysis excludes any one-time effects or changes in Meta's investment portfolio, but it gives investors an idea of what Meta could be worth one year from now if it stays the course.
19 times earnings is a fairly cheap price for Meta's forward earnings. So even though it has already had a phenomenal year, I wouldn't be surprised if 2024 is another great year (although I doubt the stock can triple like it nearly has). This makes Meta a must-own stock, and if one of its Reality Labs products becomes a hit, the stock could become a rocket ship. As a result, I think Meta Platforms is a great buy right now.
