In November 2022, Meta Platforms (NASDAQ: META) stock bottomed at around $90 following a 76% plunge from its all-time high. Investors felt the company was neglecting its core social media platforms, Facebook and Instagram, in favor of spending billions of dollars on projects like the metaverse, which generated minimal revenue. That strategy placed significant pressure on Meta's profitability.
CEO Mark Zuckerberg decided to make some drastic changes. By mid 2023, he had cut over 21,000 jobs, committed to spending more cautiously on the metaverse, and invested heavily in artificial intelligence (AI) to enhance Facebook and Instagram, which is already paying off with increased engagement (which leads to more advertising revenue).
Meta's reduced workforce and streamlined cost structure drove a surge in its profitability. In the recent second quarter of 2024 (ended June 30), Meta's net income grew by 73% from the year-ago period, and that followed a more than doubling in net income during each of the previous three quarters:
Meta stock surged, but it's still cheap
Meta's improved profitability sent its stock tearing higher by 464% from its November 2022 low point, to trade at over $508 as of this writing. But it's probably not done.
The company's net income over the last four quarters translated into $19.59 in earnings per share, placing its stock at a price-to-earnings (P/E) ratio of 25.9. That's a 16% discount to the 30.9 P/E ratio of the Nasdaq-100 index, implying Meta stock is still undervalued relative to its big-tech peers.
While Meta is developing AI like most tech giants, this is a good reminder that stock price performance is often driven by a company's earnings power, rather than the latest hot trend.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
