Amid the recent surge in tech stocks, shares of Meta Platforms (META), parent of Facebook, have been on an absolute tear, skyrocketing 120% over the past six months, crushing the 5% rise in the S&P 500 index. With its 14% surge in thirty days, META stock is sitting near its 52-week high of $275.35, up 126.5% year to date, compared with a 11.5% rise in the S&P 500 index.
Expand that horizon by one year, META stock is up 37%, while the S&P 500 index has risen just 2.5%. Given the strong momentum the stock has been on, investors might think they have missed the boat. But even with shares resting near 52-week highs, META stock is still down roughly 30% from its all-time high of around $384, which was the result of a massive selloff on concerns the company was overspending for its Metaverse ambitions.
Fast forward eight months later, Meta’s management have executed various cost optimization initiatives, many of which have enabled Meta to lower its 2023 expense guidance on two occasions, more recently lowering it to $86 to 92 billion from prior $89 to $95 billion. The improvement is even more pronounced when considering its original guidance range of $94 to $100 billion. These initiatives not only puts the company in a much stronger financial standing in the near term, the it is poised to improve in the long term as cost efficiencies are further realized.
As such, from a valuation perspective, and when compared to its mega-cap peers, META stock still appears undervalued. But is now the best time to buy the stock? To be sure, slowing user growth and advertising weakness at its core Facebook and Instagram apps have spooked the market into questioning Meta’s future, since the bulk of the company’s revenue comes from selling advertising placements.
iOS changes Apple (AAPL) have made it harder for apps to track the habits of its users, which are provided to advertisers. However, there has been a noticeable improvement on this front. After the company reported declines in the three preceding quarters, Meta in Q1 posted a 3% rise in revenue, reported in April. During the quarter, revenue from the flagship "Family of Apps" segment increased by 4%.
Notably, after posting declines seen in the previous three quarters, the company reported a 4.1% increase in ad revenue, which reached $28.1 billion. Just as impressive, the company reported a 26% increase in the number of ad impressions. While some might point to the 17% decline in the average price per ad, the 26% jump in the number of ad impressions is more significant in assessing overall advertising performance.
As it stands, the company has 3.81 billion monthly active people across its Family of Apps; that metric rose 5% year over year during the quarter. In other words, despite having close to 4 billion people active on the platform each month, the company is still finding ways to grow. In that vein, there still remains a massive opportunity for Meta to boost its monetization efforts of users outside the U.S. and Canada.
What’s more, thanks to its strong free cash flow generation and consistently high profit margins, Meta sat on $37 billion of cash, cash equivalents, and marketable securities on its balance sheet. This compared with only $10 billion in long-term debt, putting it in a strong financial position to buy back more stock, after scooping up some $28 billion worth of its shares in 2022. For this reason, I rate Meta stock a strong buy even though it trades near 52-week highs.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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