Meta Platforms Has experienced a 400% surge over the past two years; is it the ideal moment to invest in this relentless share?
Facebook Inc. (META 0.66%) undeniably leads in the tech and web sectors. It's been a remarkable success story, consistently delivering significant returns to its long-term investors, a trend that continues up to the present.
At present, this online social network stock has skyrocketed approximately 400% over the past two years. This means that an initial $10,000 investment made 24 months ago would be worth approximately $50,000 today. Such growth is hard to rival.
But is it a good time to invest in Facebook shares now?
Regaining Stability
Facebook shares experienced a setback in 2022, just like the broader market. During that period, the company reported a surprising 1% drop in year-over-year revenue, following years of substantial double-digit growths. Due to the aggressive interest rate hikes by the Federal Reserve to combat inflation, advertisers scaled back their spending, impacting Facebook negatively.
In the same year, the company's operating profit margin was 25%, a decrease from 40% in 2021. The company's costs increased by 23% as it focused on restructuring efforts, upsetting shareholders, leading to a 64% drop in shares that year.
However, the company has since recovered and is in a much better position now. Revenue grew by 16% and then rose by 22% in the first nine months of this year. Moreover, profitability has improved with Meta reporting a 43% operating profit margin in the third quarter of 2024.
The management team is so optimistic about the company's position that they approved dividend payments for the first time ever in May of this year. The company distributed its first-ever quarterly dividend of $0.50 per share in June. With the company generating $15.5 billion in free cash flow in the latest quarter, there's ample capital for dividends and share buybacks.
Facebook's AI Focus
Artificial Intelligence (AI) has been the buzzword in the business and investment worlds lately. In the last couple of years, executives have shifted their strategies to concentrate more on AI initiatives. Investors, too, have flocked to stocks with AI exposure.
Given its $1.4 trillion market capitalization and over 3.3 billion daily active users across its social media platforms, it's no surprise that Facebook is already a significant player in the AI boom. The business's Meta AI assistant already has 500 million monthly active users. And with AI-powered suggestions, users are spending more time on Facebook and Instagram.
This makes the platforms more attractive to advertisers seeking to target a captive audience. "Over a million advertisers used our GenAI tools to create more than 15 million ads in the last month," said CEO Mark Zuckerberg in the Q3 2024 earnings call.
Facebook plans to invest $38 billion to $40 billion in capital expenditures this year to strengthen its network infrastructure. And this investment is expected to increase significantly in 2025.
Evaluating the Stock's Valuation
Exactly two years ago, Facebook shares traded at a price-to-earnings (P/E) ratio of 10.6. Looking back, that valuation made buying the stock seem like an undeniable opportunity given the stock's subsequent price increase.
Investors considering purchasing this dominant enterprise currently should be comfortable with a higher valuation. The stock now trades at a P/E multiple of 26.2. The S&P 500 also trades at a P/E ratio of 25.7, placing Facebook in the same league as the average stock.
However, one could easily argue that this is a superior business that deserves such a valuation. To clarify, shares aren't as cheap as they were a couple of years ago. But for investors looking to add a dominant internet company to their portfolios, paying a premium to own Facebook might be a smart move.
Considering Facebook's impressive growth and transition into AI-focused initiatives, investing in its shares might be an appealing opportunity. The company's P/E ratio of 26.2, while higher than two years ago, is comparable to the S&P 500's ratio, suggesting that it may be considered a superior business with a justifiable premium. Moreover, the management's decision to distribute dividends for the first time ever and the company's strong financial performance indicate a stable investment prospect. In terms of finance and investing, this could potentially yield favorable returns, especially considering the impressive growth of the company's stock over the past two years.
