Is Meta Platforms stock a buy?

Meta platforms (META 0.90%) has been an investor’s dream stock, returning 90% over the past year and an even more spectacular 548% since its 2022 low, when the stock briefly traded below $90.

Compared to a disappointing slowdown after the worst of the pandemic, the social media giant has claimed operational and financial success by focusing on core strengths. An all-encompassing approach to artificial intelligence (AI) as a new growth engine has given shareholders plenty to cheer about.

The headlines are positive, but do they make the stock a buy today? Let’s discuss if the rally in the Meta Platforms can continue.

MetaAI generates strong growth in 2024

Meta Platforms is recognized globally for its family of apps and platforms, including Facebook, Instagram and WhatsApp, that help people around the world stay connected. Its vast user base and significant reach (3.3 billion daily actives) have proven to be very attractive to advertisers.

The trends at Meta this year were very impressive. In the fiscal second quarter (for the period ended June 30), total revenue increased 22% year-over-year, driven by a 10% increase in ad impressions delivered across the app family, while average cost per ad was also 10% higher. .

Much of the momentum is the impact of new AI features on ad performance. Improved ad targeting based on AI recommendations has led to higher conversions for marketers, which in turn supports higher demand for ad campaigns. Meta has also released AI tools such as its MetaAI virtual assistant with text and image generation to keep users engaged.

This dynamic, with cost control measures, translated into strong profitability. Q2 earnings per share (EPS) rose 73% year-over-year to $5.16, while free cash flow hit $11 billion.

According to consensus estimates, Meta should grow revenue by 20% this year and maintain a double-digit pace through 2025 and beyond. Earnings should also increase further, with margins benefiting from AI’s improved scale.

Image source: Getty Images.

Be careful before you buy Meta

There’s a lot to like about Meta Platforms, which proves it can continue to innovate through AI. Initiating a quarterly dividend of $0.50 per share earlier this year solidifies it as a top stock. That said, it’s also worth considering potential weaknesses in the company’s profile that could pose risks down the line.

One area of ​​concern is that the company has failed to materially diversify beyond advertising. Meta has the Oculus line of virtual reality headsets along with the recently prototyped Orion augmented reality smart glasses, but those products aren’t expected to be major growth drivers for the overall business anytime soon.

This is in contrast to other “Magnificent Seven” technology stocks that have several different operating segments. For example, Alphabet it is also a major player in internet search advertising, but it also has the video sharing platform YouTube, along with the Chrome and Android operating systems.

The question mark is how exposed the Meta Platforms would be during an economic downturn where advertising pulls back. Other tech giants like Microsoft and Amazon it might prove to be more durable.

In terms of valuation, Meta Platform stock trades at 27 times full-year consensus EPS as a forward price-to-earnings (P/E) ratio. This level represents a reduction compared to Microsoft and Applewhich are over 32, but still a big premium compared to Alphabet, which is closer to 21. It’s not clear that Meta is significantly over- or undervalued.

META Data ON Report (before) by YCharts

Decision time for Meta Platforms stock

Meta has everything in place to continue rewarding shareholders over the long term. Still, I think a hold rating is prudent for now, balancing high expectations after what has already been a stunning rally this year. Patient investors may be able to get hold of Meta Platforms shares at a lower price during the next round of volatility or find more compelling opportunities elsewhere in the market.