What’s Behind The 400% Rise In META Stock?

META Platforms stock (NASDAQ: META) has experienced a significant surge of nearly 30% in the past month, driven by investor optimism regarding a potential trade agreement with the UK and a 90-day rollback of recent tariffs between the U.S. and China. This performance notably outstrips the broader Nasdaq index, which has risen by 17%. However, it’s important to note that the stock has also faced its share of negative news. The Wall Street Journal recently reported a delay in the rollout of a flagship AI model, citing difficulties in enhancing the capabilities of its “Behemoth” large language model. Separately, see – Is UNH Stock Now A Falling Knife?

Looking at a longer timeframe, META’s outperformance is even more significant, delivering a stellar 437% return since early 2023—climbing from approximately $120 to around $645—compared to the Nasdaq’s 83% increase over the same period. This substantial growth can be attributed to:

• An 80% increase in the company’s price-to-earnings (P/E) ratio, from 14x in 2022 to 25x currently.
• A 188% jump in the company’s net income, from $23 billion to $67 billion over the same period.
• A 4% decrease in total outstanding shares to 2.6 billion.

Let’s delve deeper into these factors. While META stock has performed remarkably well, if you are looking for an upside with a smoother experience than an individual stock, consider the High Quality portfolio, which has surpassed the S&P, achieving >91% returns since its inception.

Rising User Base Is Powering Meta’s Revenue Growth

Meta Platforms operates the world’s most popular social network, enabling people to connect with friends and family. The company’s primary revenue source is advertising, which it delivers to advertisers by targeting specific demographics based on user-provided information across its platforms.

Meta Platforms has experienced a significant 46% revenue increase, rising from $117 billion in 2022 to $170 billion over the last twelve months. This growth can be attributed to both an increase in ad impressions and a higher average price per advertisement.

Furthermore, the daily active people (DAP) across Meta’s family of apps have grown by 16%, from 2.95 billion in 2022 to 3.43 billion currently. A substantial portion of the company’s revenue is generated from ad sales on its key platforms: Facebook, Instagram, Threads, and WhatsApp. Meta is currently benefiting from its strategic investment in artificial intelligence, which allows for more effective ad targeting. Looking ahead, the company intends to leverage AI to generate more content.

What’s Driving Meta’s Profits?

Over the past three years, Meta Platforms has demonstrated strong financial performance. Its net income margin has nearly doubled, increasing from 19.9% in 2022 to 39.2% currently. This improvement is attributable to continued user growth, optimized AI infrastructure, effective ad targeting, and strategic cost reductions, including workforce adjustments.

This operational success is reflected in a substantial 188% increase in Meta’s net income, which rose from $23 billion to $67 billion over this period. Additionally, Meta’s aggressive share repurchase program, totaling $90 billion, has reduced its outstanding shares by 4%. The combined effect of rising revenues, expanding profit margins and significantly higher net income, and fewer shares outstanding has driven a 198% surge in the company’s bottom line, from $8.59 per share in 2022 to $25.64 now.

Investor Optimism Fuels Higher Valuation

The recent positive performance of Meta Platforms stock reflects investor confidence in the company’s revenue-generating potential. The growth in both ad impressions and the average price per ad suggests strong future sales.

Furthermore, Meta’s strategic investment in AI is expected to enhance advertising revenues through better user engagement and targeting.

This positive sentiment, driven by the company’s improved financial performance—including strong sales growth and increased profitability—is demonstrated by the significant increase in Meta’s price-to-earnings (P/E) ratio, which has risen from 14x in 2022 to the current 25x.

Navigating the 2022 Market Downturn

This financial change unfolded against a backdrop of a challenging market environment, specifically the inflation shock of 2022 that caused a significant stock market correction. During this downturn, META stock experienced a substantial 77% decline, falling from its September 2021 peak of $382 to a low of $89 by November 2022—a sharper drop than the S&P 500’s 25.4% fall. Meta’s subsequent recovery was gradual, with the stock eventually returning to its pre-crisis peak by January 2024, illustrating both the market’s severity and the company’s inherent ability to bounce back.

But What Next? Is META Stock A Buy At $645?

With a current trading price around $645, Meta Platforms’ price-to-earnings (P/E) ratio stands at 25, based on its trailing adjusted EPS of $25.64. This is a notable increase from its three-year average P/E of roughly 16x.

Despite this seemingly high multiple, the premium appears justified by the company’s considerable opportunities in the fast-growing AI space. These AI developments are expected to drive stronger sales growth through more effective ad targeting and content creation, building upon the company’s 12% average sales growth over the past three years with slightly higher projected rates.

We estimate Meta Platforms’ valuation at $702 per share, suggesting a potential upside of approximately 10% from current levels. For long-term investors, META stock may signify an opportunity, considering the company’s strong fundamentals and positioning in the AI market. However, those apprehensive about near-term volatility should contemplate suitable strategies, such as the Trefis High Quality (HQ) Portfolio strategy, featuring a selection of 30 stocks, that has a history of comfortably outperforming the S&P 500 over the previous four-year span. Why is that? As a collective, HQ Portfolio stocks have delivered superior returns with reduced risk compared to the benchmark index; less of a roller-coaster experience, as shown in HQ Portfolio performance metrics.