Over the past decade, the FAANG stocks have represented the pinnacle of tech investing. However, after a terrible 2022, where many of them lost significant value, some wondered if their run was over. 2023 was a sharp reversal of that trend, and many FAANG stocks regained their status as great investments.
The group is made up of these stocks:
- Facebook (now known as Meta Platforms (META 0.93%))
- Amazon
- Apple
- Netflix
- Google (now known as Alphabet)
None of these five had a better 2023 than Meta, whose stock rose around 170% in 2023. The next-highest performer (Amazon) increased by about 75%, and the worst (Apple) saw shares rise by nearly 50%. So, while none of the companies in this group had a bad year, none are close to Meta Platforms' performance.
But has the stock run up to the point where it won't have a great 2024? Let's take a look.
Meta Platforms is a tale of two segments
Meta Platforms is made up of two business segments: Family of Apps and Reality Labs. Its former name, Facebook, was a clear indicator of what the company was, although it also had other social media platforms like Instagram, WhatsApp, Messenger, and Threads. However, because of CEO and founder Mark Zuckerberg's desire to develop the metaverse, the company changed its name to reflect that vision.
The products and expenses within the Reality Labs segment of Meta reflect this vision, although the results haven't been pretty.
So far in 2023, Meta Platforms has generated about $95 billion in revenue and $30 billion in operating profit, which is pretty good. But when you break down where this revenue and profit came from, you get a better picture of the company.
| Segment | Revenue | Operating Profit |
|---|---|---|
| Family of Apps | $93.9 Billion | $41.8 Billion |
| Reality Labs | $723 Million | ($11.4 Billion) |
| Total | $94.7 Billion | $30.3 Billion |
Data source: Meta Platforms.
Clearly, the Family of Apps keeps the light on for Meta, and Reality Labs is just a dream. But that doesn't tell the full story either, as Reality Labs had its lowest Q3 revenue in two years. This shows that the market's interest is quickly fading in the metaverse and augmented or virtual reality, which doesn't bode well for Meta's plans.
But if you're a Meta Platforms investor, you kind of need to forget about Reality Labs, as Zuckerberg is hell-bent on bringing this realm to reality.
Instead, you should focus on the Family of Apps because the results are extraordinary.
Sustained profitability improvements make the stock look cheap
Meta's social media platforms generate most of their revenue from advertising, which was not a great business to be in 2022 as many companies slashed advertising budgets to prepare for what many predicted would be an economic recession in 2023. Now that that has not become a reality, companies are returning to the various platforms to advertise in force.
After ad revenue bottomed in the first quarter this year, Meta's ad revenue posted solid quarterly growth numbers and set a new all-time high in Q3. With Q4 being a historically strong month (due to holiday advertising), investors can expect more growth from Meta.
But what about in 2024? An average of 50 analysts project revenue growth of 13%, which is respectable for a company the size of Meta. However, earnings per share (EPS) should dramatically rise in 2024.
Meta wasn't optimized for profits earlier in 2023 (and Q4 2022) because of the soft advertising market. As a result, its profit margins tumbled.
META Profit Margin (Quarterly) data by YCharts
Now that they have recovered to previous levels, if Meta can maintain its 34% profit margin and rack up $138 billion in revenue (as Wall Street predicts), then it should produce a net income of about $47 billion. That would value Meta Platforms at about 18 times forward earnings.
Meta's stock looks cheap compared to the S&P 500 index's 21 times forward earnings valuation. I'd say Meta is a much better company than many of the constituents of the S&P 500, so buying it for a price cheaper than the index as a whole is a great bargain.
So, will Meta be the top-performing FAANG stock in 2024? I'm not sure, but with advertising growth and a low valuation, it has a strong case for the top pick.
