Social media giant Meta Platforms (META 0.43%) has been on a roll, appreciating nearly 400% since bottoming out in October 2022. But past performance is no guarantee of future growth. Investors may wonder if the stock can still be a difference-maker in their portfolios when it is already at over a trillion-dollar valuation today.
The answer? A resounding yes!
Despite its massive size, Meta can still deliver great returns by returning large sums of cash to shareholders via dividends and share repurchases. Here is what you need to know.
Meta is a cash flow machine
People love social media. Meta, which owns Facebook, Instagram, Threads, and WhatsApp, reports that 4 billion people log into its apps monthly. Unfortunately, there are downsides to social media use. Studies have shown that it can be addictive and negatively affect mental health. Still, it hasn't stopped people from spending hours online daily. Meta makes billions of dollars from advertising to its social media audiences.
Meta pulled in $135 billion in revenue last year. A staggering $44 billion ended up being free cash flow, or profits the company can use as it pleases. It's important to note here that this free cash flow is what's left over after investments were made back into the company. That $44 billion is what's left over after all the spending on Reality Labs.
META Revenue (TTM) data by YCharts
Meta's free cash flows should only grow in time. Analysts project Meta's revenue will increase to $270 billion by 2030. If it maintains the same cash flow conversion rate, free cash flow would be $88 billion in 2030, double its current level. What could drive that? Several factors are expected to contribute, including continued app user growth, better monetization of said apps, and the potential success of Reality Labs, which currently operates at a loss.
Making it rain on shareholders
Meta's meteoric rise has been a bonus for investors over the past 18 months, but the long-term investment returns will likely come more from dividends and buying back stock instead of pure market cap growth. Meta has already proven prolific at lowering its outstanding shares. Management has bought back enough shares to reduce the count by nearly 11% over the past five years alone.
META Shares Outstanding data by YCharts
Additionally, Meta recently initiated its first-ever dividend. This is significant because it signals management's intention to return even more cash to shareholders. The announced dividend will cost the company approximately $5 billion annually, or 11% of its cash flow. Suppose Meta does double its cash flow by 2030. That would mean the company can raise its dividend roughly 12% annually without affecting the payout ratio. That also doesn't factor in share repurchases, so the dividend could grow faster and maintain the payout ratio as the total number of shares decreases.
Meta is helping shareholders buy, hold, and prosper
Great companies like Meta are simple. You buy and hold them when the price is reasonable or better, and let the company's earnings growth and dividends create wealth for you for years to come. The question is whether Meta is a reasonably priced stock today. I'll do you one better: Meta is a bargain, even after its epic 18-month run.
This is why: Analysts believe the company will earn just shy of $20 per share this year, 25 times earnings at today's share price. Consensus estimates point to an average of 20% annual expected earnings growth over the next several years. I like using the price/earnings-to-growth (PEG) ratio to compare a stock's valuation to the underlying company's anticipated growth.
Generally, I look for PEG ratios under 1.5, and Meta's is just under 1.3. In other words, Meta is a buy today based on the company's expected earnings growth.
Don't overcomplicate this. Meta looks like an outstanding stock to buy and hold today. Let it work for your portfolio over time. It just might help make you a millionaire over the long term.
