As earnings season kicks into gear, all eyes are on big tech. Why? Well, the "Magnificent Seven" stocks all played an important role in the Nasdaq Composite's 43% surge last year, and momentum has gotten stronger in 2024, which has helped the S&P 500 soar to new highs.
Following its fourth-quarter earnings report on Feb. 1, Meta Platforms (META 0.43%) rocketed by more than 20% and re-entered the exclusive club of trillion-dollar companies.
While progress in artificial intelligence (AI) applications is front and center for investors, Meta's management was sure to tame expectations amid the enthusiasm. Nevertheless, investors are cheering on the stock.
Let's dig into two important developments outside of AI that may be influencing the recent price action.
1. $50 billion share repurchase
In 2022, Meta had its eyes on a new growth driver called the metaverse. The company invested heavily in applications such as augmented and virtual reality, and bolstered its headcount significantly. Unfortunately, investors quickly soared on this strategy due to the toll these investments were taking on Meta's overall revenue and profits. The company's core advertising business stalled while expenses mounted, resulting in deteriorating cash flow. Unsurprisingly, Meta stock cratered by more than 60% in 2022.
Toward the end of 2022, a prominent venture capitalist (VC) named Brad Gerstner penned an open letter to Meta's executive leadership and board of directors. Gerstner urged the company "get fit" and return to its roots. Last year, Meta employed a series of layoffs to right-size its cost structure and turned its focus back to the advertising business.
For the full year 2023, Meta grew its revenue by 16% year over year and expanded its operating margins by 10 percentage points. The combination of accelerated revenue growth and margin expansion helped fuel growth in free cash flow by nearly 140% year over year.
With $65.4 billion in cash and marketable securities on its balance sheet, Meta appears to be deploying this capital to reward shareholders in two ways.
First, the company repurchased $20 billion of stock in 2023. Moreover, as of Dec. 31, Meta had roughly $31 billion available and authorized by the board for share repurchases. In addition, the company announced an increase of $50 billion to its share repurchase authorization during the earnings call.
Given where Meta stock began trading in 2023, coupled with the company's attractive valuation, it's not entirely surprising to see a buyback. However, the announcement of the $50 billion increase was encouraging to see as Meta appears to be well-positioned for the next phase of long-term growth fueled by artificial intelligence (AI).
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2. Quarterly dividend
Although the share repurchase news was nice to see, it appears that Meta has found additional ways to deploy its excess profits. Perhaps more surprising was the announcement of the company's first dividend. Per the earnings release, Meta will pay a quarterly dividend of $0.50 per share.
The company's CFO, Susan Li, commented on the development, saying that "introducing a dividend really just serves as a nice complement to the existing share repurchase program."
I see this as an important step for Meta as it matures. Generally speaking, growth companies typically do not pay dividends, as any excess cash that is generated tends to be reinvested in additional research and development (R&D) or marketing efforts. Meta is only the fourth Magnificent Seven stock to pay a dividend -- joining Microsoft, Apple, and Nvidia.
The bottom line
When it comes to tech stocks, a lot of investors seem to be enamored of the prospects of artificial intelligence (AI), and rightfully so. The proliferation of generative AI can't be understated. However, prudent investors should realize that use cases for the technology are still very much in discovery territory, and the long-term gains for AI could be years away.
In the meantime, Meta has found other creative sources to rally investor enthusiasm. With accelerating revenue, margins, and cash flow, Meta is showing some true signs of a healthy, maturing business. Moreover, its forward price-to-earnings (P/E) multiple of roughly 23 is nearly identical to that of the S&P 500. This could signal that investors do not think Meta's growth prospects are more attractive than the broader market's.
I see Meta as an attractive opportunity at its current valuation, and think using dollar-cost averaging to scoop up some shares could be a wise decision in the long-run. The combination of share repurchases and a dividend certainly make the company stand out among its cohort, and the stock looks tempting for AI investors in particular.
