The terrible market environment in 2022, coupled with investor pessimism surrounding founder and CEO Mark Zuckerberg's metaverse ambitions, hurt Meta Platforms (META 0.43%) that year. Share prices fell an eye-watering 64% in 2022.
This top social media stock has been on an absolute tear since that 2022 low thanks to strong financial results and a raging bull market. As a result, the stock price has skyrocketed 321% since the end of 2022. And yet, even with that sizeable stock price performance, the shares still look like a smart buy today.
Here's why.
Meta still has a reasonable valuation
There's no doubt that Meta has to be one of the best-performing stocks since the start of 2023. Even with this huge gain, Meta shares trade at a forward price-to-earnings ratio of 25.6. That represents a discount when compared to the 30.4 average forward P/E from the tech-heavy Nasdaq-100 index.
According to Wall Street analyst estimates, the company is set to grow revenue and earnings per share at compound annual rates of 14% and 21.3%, respectively, over the next three years. While it's smart to take forecasts with a grain of salt, this outlook makes it incredibly easy to be bullish.
Tech giants gain an advantage on numerous levels
Meta's valuation looks even more compelling when you consider just how dominant this business is. Three of the company's social media platforms -- Facebook, WhatsApp, and Instagram -- are ranked in the top 4 spots globally for overall users. A fourth platform, Messenger, is ranked seventh. Combined, these four apps have a whopping 4 billion-plus monthly active users. And that total increased by 6% year over year in 2023's Q4.
Almost half of the global population interacts with a Meta internet property at least once per month. No other enterprise has this kind of reach.
From a competitive standpoint, Meta benefits from incredibly powerful network effects thanks to these various social media apps, making it very hard for a competing service to gain any meaningful adoption (although ByteDance's TikTok is trying hard to do so).
Given the attention and engagement these apps command, it provides Meta with a significant data advantage. Meta has leveraged this data advantage to become a leader in digital advertising (which relies on getting targeted advertising to the right viewership). Advertisers want to do business on a platform that can give them great value for their ad spending. This helped Meta pull in $132 billion in revenue in 2023 (accounting for 98% of the company's overall revenue).
Meta's business model ensures profitability
Meta's business model ensures it has high margins if it can keep its costs under control. Meta's 2023 operating margin of 35% helped drive $43 billion of free cash flow generation. Such margins are the norm for this company. Those margins helped Meta produce $122 billion of operating cash flow in the past two years. Totals that high exceed the total valuation of all but the largest companies out there. As of Dec. 31, the business carried a net cash position of $47 billion on its balance sheet, giving it plenty of spare cash to continue investing aggressively in its CEO's metaverse goals.
Strong finances have also allowed Meta to return capital to shareholders in the form of stock buybacks and dividends. In the last 12 months, it spent $20 billion on reducing the outstanding share count. With its most recent financial report, Meta announced a $0.50 per share quarterly dividend that might entice income-seeking investors.
Considering its attractive valuation, dominant social media reach, and stellar finances, you will find no shortage of reasons why Meta is a smart stock to consider buying right now.
