The investing conditions that characterized 2022 were among the most challenging in recent memory, but the economic landscape has shifted. After plummeting more than 35% in 2022, the Nasdaq Composite came roaring back in 2023, up 43%.
Yet history says the rally could continue into 2024. Records going back to 1972 -- the first full year the Nasdaq traded -- show that in every year following a market rebound, the tech-heavy index has risen 19%, on average, which suggests there could be more to come. The economy remains the wild card, and things could certainly change for the worse, which is something to keep in mind.
Helping propel the market gains this year are a group of investor favorite stocks collectively known as the "Magnificent Seven," which have outperformed the broader market by a landslide:
- Nvidia: up 239%
- Meta Platforms (META +0.99%): up 194%
- Tesla: up 102%
- Amazon: up 81%
- Alphabet: up 58%
- Microsoft: up 57%
- Apple: up 48%
The link between these tech behemoths is artificial intelligence (AI). Most market watchers acknowledge this was the catalyst that sparked the 2023 market rally, which has investors looking to capitalize on this once-in-a-generation opportunity. One company that represents an intriguing possibility is Meta Platforms. While the stock was a standout performer in 2023, there could be much more to come.
Image source: Getty Images.
The elephant in the room
Some investors might point to the fact that Meta Platforms nearly tripled last year as a reason to avoid the stock, but that needs to be viewed in context.
The macroeconomic headwinds of the past couple of years affected many companies, but Meta Platforms was hit particularly hard. The lion's share of the company's revenue comes from the digital advertising shown on its family of social media sites. The period was characterized by reduced marketing budgets, as ad spending can be dialed back or ramped up on short notice, generally without serious repercussions for the business. Meta is the world's second-largest online advertising platform, representing roughly 20% of the market, so the business was especially vulnerable to the economic environment.
As a result, Meta Platforms experienced its first year-over-year revenue decline in company history. The stock plunged, losing as much as 74% of its value. This year's rebound merely brought the stock back to where it was before being crushed by the downturn.
A solid foundation for growth
Meta Platforms' rebound has been nothing short of astonishing, but its financial results underpin its recovery. In the third quarter, revenue of $94.8 billion climbed 23% year over year. Perhaps as importantly, the company's cost-cutting campaign reduced expenses by 7%, dropping more to the bottom line. As a result, earnings per share of $4.39 represented a 168% increase, which illustrates how Meta was able to leverage its reduced cost structure.
Backstopping the financial results was a strong business performance. In September, 3.14 billion people visited one of Meta's social media sites, up 7% year over year, while 3.96 billion stopped by every month as of September, also up 7%. This performance provides plenty of opportunity to expand the online advertising that fuels Meta's growth.
NASDAQ: META
Key Data Points
The AI wildcard
Meta has long used AI to enhance its business. The most obvious consumer-facing uses included identifying people in photos posted on the site and surfacing relevant content and advertising for users. Meta has made no secret of its plans to unleash generative AI to further advance its agenda.
Earlier this year, Meta launched a suite of free AI-powered marketing tools for merchants that advertise on its social media sites. The company's Ads Manager can customize images and text to help merchants better reach their target audience. These tools will help them generate backgrounds, adjust the aspect ratio to accommodate different advertising mediums, and more.
The vast treasure trove of user data and years of platform history provided Meta with everything it needed to generate its own large language model, which forms the foundation for generative AI. While Meta doesn't have the advantage of a cloud distribution platform, it quickly made its Llama AI available on each of the major cloud infrastructure services, including Amazon Web Services, Google Cloud, and Microsoft Azure -- for a fee. This was a brilliant way to stake a claim in the AI revolution, especially since it adds an entirely new revenue stream to fill Meta's coffers.
Meta's large opportunity
Meta is currently selling for 25 times forward earnings, a slight discount to the S&P 500. What's more, at roughly 6 times sales, it's a discount to its seven-year average of nearly 9 times sales. While the stock is no longer the screaming buy it was last year, it's still remarkably cheap given its prospects.
The rebound of the advertising market has already begun, but things are looking up for 2024. After rising 5.5% in 2023, global ad spending is expected to increase by 7.2% in 2024, according to industry strategist Magna Global. As one of the world's largest digital advertisers, Meta is well-positioned to ride that wave.
Given the improving ad market, its position in the industry, and its relatively inexpensive stock price, I'd suggest now is the time to buy Meta as the tech rally appears likely to continue in 2024.
