With the S&P 500 index notching a new all-time high, it's not surprising that many of its constituents are doing the same. One of the largest companies in that index is Meta Platforms (META 0.18%), the parent company of Facebook, Instagram, and other social media sites.
Investors may shy away from buying stocks that have reached fresh all-time highs. However, this is a mistake, as these companies are usually executing at a very high level if they're achieving new highs. Meta falls into this category, and I think the latest round of new record highs could be extended for some time.
Meta Platforms is primarily an advertising business
Meta Platforms runs some of the most successful social media sites, but some may be confused by how this makes so much money. Because these platforms are free to use, investors must realize that the users are the products being sold. In Meta's case, it sells advertising that allow advertisers to target users based on demographics, preferences, and location.
This highly successful business model allowed Meta's stock to reach new heights. In the second quarter of 2024, Meta's advertising segment generated $38.3 billion in revenue, up 22% year over year. This accounted for 98% of Meta's overall revenue, so it clearly controls the company's direction.
It's also massively profitable, with Meta's Family of Apps division generating operating income of $19.3 billion in the quarter ended June 30. If this were the only part of Meta's business, the stock would likely be much higher, as it would have more resources to return to shareholders in the form of stock buybacks or dividends.
However, Meta is using some of that money to fund its other endeavors.
Meta's new product has the potential to be a hit
Another part of Meta is its Reality Labs division, home of its augmented- and virtual-reality projects. While consumers saw some of these devices come to market as gaming headsets, a lot of money is put into Meta's pursuit of making everyday smart glasses that can be used for multiple tasks.
The public finally saw what these glasses look like with Meta's demonstration of its Orion augmented-reality glasses. The use case for these glasses remains to be seen, but investors now have an idea of what Meta is spending its money on, which gives them hope that eventually, they will see some return on that investment.
Image source: Meta Platforms.
We're likely a long way off from seeing meaningful revenue generated by these devices -- the Reality Labs division lost $4.5 billion in the second quarter -- but it gives an idea of where Meta is heading.
However, I still think this is not a factor in an investing thesis for Meta, as its base advertising business is still excelling. If these Orion glasses turn out to be a hit, then that will be a cherry on top.
Despite its fresh all-time highs, the stock is still priced at a point where it's not overvalued.
META PE Ratio (Forward) data by YCharts
Meta's stock is valued at the highest point it has been all year from a forward price-to-earnings ratio (P/E) basis, but it's still cheaper than many companies it's commonly compared to within the big tech space.
| Company | Forward P/E Ratio | Last Quarter YoY Revenue Growth |
|---|---|---|
| Apple | 34 | 4.9% |
| Microsoft | 32.8 | 15.2% |
| Nvidia | 43.7 | 122.4% |
| Alphabet | 21.3 | 13.6% |
| Amazon |
40.5 | 10.1% |
| Meta Platforms |
26.6 | 21.7% |
| Taiwan Semiconductor |
28.3 | 32.9% |
Data source: YCharts. YoY = year over year.
Meta Platforms is an optimal compromise between its valuation and growth. This will likely cause it to consistently notch new all-time highs for the foreseeable future, making it a top stock to buy now.
