Few companies have taken investors on as much of a roller coaster ride as Meta Platforms (META 0.57%), formerly known as Facebook. In late 2021, Meta's stock hit an all-time high of $382 before plummeting to a bottom of $89 per share in late 2022 -- a greater than 76% drop.
However, the stock has marched straight up since then, setting a new all-time high in January 2024 before jumping an astounding 20% to $475 after reporting Q4 earnings.
With Meta Platforms solidly back in the trillion-dollar stock club, many investors may wonder if it's time to take some gains or sell the stock outright. After all, if you bought at the bottom, you're up 434% in just over a year. Despite a strong temptation to do that, I think it's a mistake, especially after reviewing what the company said.
Meta Platforms had an incredible Q4
While Meta Platforms changed its name to signal its shift to focusing on the metaverse, it's still an advertising business at heart. Its Facebook, Instagram, WhatsApp, Messenger, and Threads platforms generate a massive amount of revenue from ads.
This was part of the reason Meta's stock was so beaten down in 2022. Meta was heavily investing in its money-losing metaverse products and, at the same time, its ad business was suffering. However, both of those markets have substantially turned around.
The move in the ad market came in Q3, as ad revenue rose 24% year over year to $33.6 billion. That strength continued into Q4, with ad revenue again rising 24% to $38.7 billion. Combined with various optimization efforts across the business (mainly accomplished through layoffs), this segment delivered an impressive $21 billion in operating income -- a 54% margin.
But what CEO Mark Zuckerberg wants to work on is Reality Labs' revenue, which broke $1 billion in sales for the first time, thanks to the strength of its Quest 3 headset. This division is still far from profitable, as its operating loss was $4.6 billion -- the highest it has ever been. Thanks to its ad business doing better, Zuckerberg was again sinking a lot of money into this bet and noted that Reality Labs' operating losses would increase meaningfully in 2024 due to product development efforts.This is a reversal from Zuckerberg's previous stance of making 2023 the "year of efficiency." However, now that Meta has downsized and its ad business is doing better sinking money into the Reality Labs division is more palatable to investors.
Still, with Meta's primary business doing as well as it is, this increase may not matter. But with a price movement like Meta has experienced, is it still worth owning?
The stock doesn't look expensive, compared to its peers
Meta's business has done so well over the past year because it was valued at incredibly low levels at worst-case scenario margins. Now that its margins have improved and investors are more optimistic, Meta has returned to a point where it's historically valued.
META PE Ratio data by YCharts.
By dividing the stock price by its earnings per share, we can understand how much investors are willing to pay for the stock. With it at 32 times trailing and 25 times forward earnings, its price-to-earnings (P/E) ratio is within a range where investors should still feel comfortable adding to their position.
Meta is also cheaper than other tech giants. Microsoft and Apple trade at a respective 37x and 30x trailing earnings and 36x and 28x forward earnings. To state Meta is an overvalued stock isn't a fair assessment. Right now, it's at an average valuation, which means its business results will drive the stock price.
With Meta guiding for $35.8 billion in revenue in Q1 (growth of 27%), I'd say the future business is looking good. As a result, I think the stock is a strong buy now, even though it might have been cheaper to purchase just a few days ago.
