Meta Platforms: A Blend of Growth and Value Potential

Meta Platforms (META) has recently achieved a remarkable milestone, reaching an all-time high and crossing the $1.5 trillion mark in market value for the first time. The stock has surged by 66% in 2024 and an astonishing 387% since the beginning of 2023. This positions Meta as the sixth-most-valuable company in the U.S., following closely behind Amazon and Alphabet, which have market caps of approximately $1.96 trillion and $2.06 trillion, respectively.

Meta's Growth Outlook

Investing fundamentally revolves around identifying companies that can increase their earnings over time. Some companies achieve this through regular dividends and buybacks, while others, even without current profitability, are brimming with potential for the future. Mega-cap tech companies like Meta, Amazon, and Alphabet are leaders in their fields, striking a balance between robust cash flows and significant growth potential. Meta, in particular, appears to have a very clear path to increasing its future earnings.

Meta's flagship platform, Instagram, successfully merges modern entertainment with social media, generating high margins. Unlike YouTube, which is owned by Alphabet, Instagram is primarily mobile-based and thrives on user-generated content where individuals create and share experiences, leading to increased time spent on the app.

The introduction of Instagram Stories, Live, and Reels has transformed it from a static image platform to one rich in real-time video content. User engagement has soared, as individuals can enjoy a tailored feed filled with clips that align with their interests. This environment makes Instagram a lucrative platform for advertisers, allowing them to leverage targeted marketing and quick mobile payment options to process transactions.

Moreover, advertisers benefit from detailed metrics to assess their marketing expenditures. Unlike traditional media companies such as Netflix, which must invest heavily in content creation to maintain audience engagement, Meta enjoys the advantage of its users doing much of the content creation.

Harnessing AI Trends

Meta is particularly well-positioned to capitalize on the artificial intelligence (AI) boom. The company is channeling investments into AI to enhance connections between advertisers and consumers. While people may not always appreciate advertisements, the use of relevant ads can significantly enhance user engagement.

AI has enabled Meta to refine its content recommendations, elevating the overall quality of its applications. As users spend more time on Meta's platforms, the potential for ad exposure increases. Thus, AI is serving to improve user experiences while simultaneously boosting the effectiveness for advertisers, which can be a game-changer for the company.

In contrast, Alphabet has seen AI developments create mixed outcomes. Emerging tools like SearchGPT and ChatGPT pose challenges to Google's traditional search dominance. While the introduction of features like AI Overview attempts to summarize search results effectively, its effectiveness against these newcomers remains uncertain.

On the other hand, while cloud service providers such as Amazon Web Services (AWS) and Google Cloud stand to gain from heightened AI demand, Google Cloud trails significantly in market share behind AWS and Microsoft Azure. Additionally, Amazon's overall business growth outside of AWS has been decent but lacks the dynamism seen in Meta, making Meta arguably the strongest AI investment among these tech giants.

Opportunities for Valuation Expansion

One significant factor that may allow Meta to surpass Amazon and Alphabet is its valuation metrics. As it stands, Meta boasts one of the lowest forward price-to-earnings (P/E) ratios among the tech giants, surpassed only by Alphabet while enjoying the highest free cash flow (FCF) yield among its peers.

The FCF yield is calculated simply as free cash flow per share divided by share price, meaning a higher yield reflects greater cash flow relative to the company’s market valuation.

Despite a remarkable increase nearing 400% since early 2023, Meta’s stock is still considered relatively undervalued. If its earnings growth continues to outpace stock price growth, the stock could appear even more attractive in the future. A valuation expansion, leading the market to assign a higher earnings multiple to Meta, seems plausible as the quality of its earnings improves or if optimism about its growth takes hold.

For instance, Apple illustrates this phenomenon; with a ten-year median P/E of 19.8, its current P/E has climbed to 34.5, attributed to product improvements and a flourishing high-margin services sector.

These services enhance Apple’s vertical integration, customer loyalty, and engagement while providing recurring revenue outside the typical product upgrade cycle.

In a similar vein, Meta could see its P/E ratio settle between 30 to 40 in the future. Although Reality Labs, focused on the metaverse and augmented reality, recorded an $8.33 billion operating loss in the first half of the year, removing these expenses from the equation would significantly enhance perceived profitability and attract further investment.

It’s also possible Reality Labs could eventually contribute positively to earnings rather than detract from them. This division encompasses Meta's ventures into virtual reality hardware like headsets and smart glasses. Meta’s strong financial position allows sustained R&D investments and buybacks, along with a newly initiated dividend, all thanks to the robust performance of its core platforms like Instagram and Facebook. Investors remain patient with Reality Labs' losses since the overall business continues to thrive, anticipating significant upside if this segment achieves breakthroughs.

Future Growth Potential

Looking ahead, consensus estimates suggest Meta could report earnings of $21.29 per share for 2024, rising to $24.21 by 2025. While capital-intensive investments in AI chips may somewhat impact earnings in the near term, share buybacks should reduce the share count, leading to increased earnings per share (EPS) growth expected in 2026. If EPS rises to around $28, roughly a 15% increase over the 2025 estimate, a valuation of around $1,000 per share at a P/E of 35 appears achievable.

In summary, Meta possesses the potential to double its value in the next three to five years, which seems less certain for its major competitors, Amazon and Alphabet.

Meta, Growth, Value