With the Nasdaq Composite in record territory, driven by the dominance of a handful of major tech stocks, investors might be wondering if there are any good deals in the market today. I'm here to tell you that indeed there are some solid opportunities.
One of them is none other than Meta Platforms (META -2.66%). The social media specialist has seen its shares skyrocket 277% just in the past 18 months. Even so, it still looks like a stock to add to your portfolio. Here's why.
Its unrivaled scale
With 3.98 billion monthly active users across its family of apps (including Facebook, Messenger, WhatsApp, and Instagram), Meta has reach that puts it in a league of its own. Putting that user base into perspective, nearly half of the world's population interacts with a Meta service at least once per month.
Because these apps are free to use, Meta generates the bulk of its revenue -- 98% in 2023 -- from digital advertising. The downside is that ad sales can be cyclical, as we saw in the 2022 downturn, but the upside is that they produce high profitability. The company's family of apps posted a stellar 54% operating margin in the fourth quarter.
Even better, these social media apps require zero content creation by Meta; the business simply provides the platforms for users. This creates powerful network effects: People want to use the social media apps that all of their friends and family are on.
And as more users join and more content is shared, Meta's services become even better over time. This gives me confidence that the company's competitive moat will protect it from the threat of disruption, leading to long-term success.
A focus on innovation
The hottest topic recently has been artificial intelligence (AI), and companies are trying to be at the forefront of what could be a revolutionary technology. Investors want to find the winners early on, but it's best not to overthink this. Businesses that are already leaders in the technology and internet sectors, such as Meta, are in position to benefit.
The company has introduced AI features across its family of apps to bolster the user experience. And for advertisers, Meta has integrated generative AI tools to save time and boost results. This should allow the company to charge higher prices for ads over time, especially when you consider Meta's unparalleled ability to move target-specific audiences.
Then there are its metaverse ambitions, which are housed in the Reality Labs division. Meta is working on various augmented reality and virtual reality projects that CEO Mark Zuckerberg believes could help create a new computing platform. This segment has been losing billions of dollars every quarter, but if things work out, it could be a huge moneymaker one day.
A reasonable valuation
Investors would have loved to buy Meta shares when they traded at a forward price-to-earnings (P/E) multiple of just 10 in late 2022. They were displeased with slowing ad growth and compressed margins at that time, and the reality labs division was seeing its losses soar.
But Meta's stock still trades at a compelling valuation, even after it has soared in the past year and a half. The current forward P/E of 26 is a reasonable entry point given the scale and reach of the company's social media apps, its tremendous network effects, and the focus on AI.
As the stock market stays in record territory, there are still attractive opportunities. Meta fits in this category.
