Is Meta Platforms Stock a Buy Now?

Meta platforms (META 2.26%) it was left for dead during the market crash of 2022. But since then it’s been a fantastic ride up. From the start of 2023 to the end of September this year, the stock is up 376%.

Investors should own this top social media stocktrading in record territory today? Here are three reasons why I think it could be a smart move for your portfolio.

Meta’s Network Effects

One clear reason why investors should consider owning this business is because of the presence network effects. This critical factor is exactly what Meta is all about economic moatwhich helps it fend off existing rivals and new industry entrants while supporting long-term success.

As of June 30, Meta had 3.3 billion daily active users across its family of apps, which includes Facebook, Instagram, WhatsApp, Messenger and Threads. People want to use these services because everyone they know does. And the bigger apps get, the more valuable they become because there are exponentially more connections that can be made, with more content created.

Anyone with some technical skills and capital funding could theoretically launch a new social media app. But without existing users, it would be almost impossible to attract new people to the service. This highlights how dominant the Meta has become. This business is unlikely to become obsolete anytime soon, especially when you consider that connecting with others is a fundamental human need.

The existence of Meta’s economic moat is clear when investors realize that the company currently has a return on invested capital (ROIC) of 31%, which is three times higher than the average ROIC of S&P 500. This metric demonstrates Meta’s impressive ability to generate adequate returns on the money it reinvests in the business. If the company didn’t have a moat, that ROIC figure would be substantially lower.

Strong financial performance

Meta’s moat has helped achieve incredible financial performance over a long period of time. This is another reason why investors should want to buy the stock.

The growth has been superb, driven by the age-old trend of digital advertising. Over the past decade, Meta has posted an annual compounded revenue gain of 29.7%. With the global digital advertising market projected to grow from $366 billion in 2022 to over $1 trillion in 2030, there is still a robust expansion track for Meta to take advantage of.

This is also a highly profitable enterprise. Over the past five years, the company operating margin averaged 34.8%. The bottom line was lifted by cost reductions and a renewed focus on operational efficiency.

The meta is in a position of strength because it has deep pockets and top talent. The company brought in $10.9 billion in free cash flow last quarter and has $58.1 billion in cash, cash equivalents and marketable securities. This allows the management team to invest aggressively in artificial intelligence (AI) initiatives, particularly around network infrastructure to increase computing capacity.

Meta’s rating

Given Meta’s strong gains over the past two years, it’s not nearly as attractive from a valuation perspective today. Shares are traded at a price-earnings ratio from 29.2. At first glance, this doesn’t seem all that convincing. But it’s a 9% discount for heavy tech Nasdaq 100 Index.

The valuation looks better when viewed alongside Wall Street’s outlook. The analyst community believes that earnings per share can grow at an annualized rate of 23.6% between 2023 and 2026. It’s not unreasonable to assume that solid double-digit earnings can continue for several years after that.

Meta is a top-tech company with many favorable qualities. Investors should consider adding it to their portfolios.