Source: PaxForex Premium Analytics Portal, Fundamental Insight
Not long ago, Meta Platforms was considered a lost cause on Wall Street. In 2022, the social media giant saw its value plummet by over 60%, prompting management to announce plans for significant cost-cutting measures in the following year.
However, the tide has turned dramatically in just one year. The stock of Meta Platforms, the parent company of Facebook, has surged by nearly 180% over the past 12 months, reaching a record high of $500 per share. Now, the question arises: Does this rally signal that investors have already enjoyed the best returns from this once-struggling stock?
Unsurprisingly, the stock's resurgence has been fueled by positive developments in Meta Platforms' growth trajectory. Its flagship social media apps, including Instagram and Facebook, continue to attract robust engagement, with over 3 billion users actively engaging with the platforms daily.
Investors were particularly pleased to see a substantial increase in advertising revenue, which soared to $132 billion in 2023 from $114 billion the previous year. This 15% surge in revenue outpaced the company's user growth, indicating that Meta Platforms successfully ramped up the volume of advertisements displayed without compromising user acquisition.
The ability to increase ad impressions while maintaining user growth represents a significant achievement for the company. "We had a good quarter as our community and business continue to grow," remarked CEO Mark Zuckerberg in an early February press release, reflecting on the positive momentum Meta Platforms has achieved.
There are several aspects of Meta Platforms' expanding earnings potential that investors find appealing. Although the Reality Labs division, which houses products like Meta's virtual reality headsets, reported wider losses in 2023, the overall business nearly doubled its earnings over the past year.
In fact, operating income surged from $29 billion to $47 billion, resulting in an impressive 35% margin in operating profit. While Meta Platforms performed better during the peak of the pandemic, it's worth noting that other tech giants, such as Microsoft, currently boast higher profitability.
Nevertheless, Meta is making significant strides toward reclaiming the record 50% operating margin witnessed before the pandemic. Most analysts on Wall Street anticipate a 33% increase in earnings per share this year, reaching $20.
However, there's a notable risk associated with buying Meta Platforms stock amid heightened optimism, which could potentially limit returns. The company's shares are currently priced at 10 times annual sales, marking one of the highest valuations seen to date. It's worth remembering that just a year ago, you could have acquired this business for approximately 3 times revenue.
Yet, Meta's stock surge isn't solely driven by lofty expectations surrounding the potential impact of artificial intelligence (AI). There's substantive growth underlying this rally. The company is accelerating its user base and core advertising business growth. While Meta can't infinitely increase ad exposure to users, it still has room to enhance sales as pricing trends for digital ads strengthen in 2024.
Moreover, there's a strong possibility that margins will inch closer to 50% of sales in the next few years as research and development investments yield greater returns. In such a scenario, Meta Platforms could easily justify its premium valuation of 33 times earnings and 10 times sales over the coming years. Therefore, a price of $500 per share doesn't seem excessive for this impressive growth stock.
As long as the price is above 450.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 483.69
- Take Profit 1: 525.00
- Take Profit 2: 550.00
Alternative scenario:
If the level of 450.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 450.00
- Take Profit 1: 430.00
- Take Profit 2: 420.00
