Meta Platforms stock has been a red-hot buy this year, but can its rally continue?
After soaring an incredible 194% in 2023, shares of Meta Platforms (META 0.60%) are continuing to rise even higher this year, with the social media stock up another 47% since January. Meta has been one of the hottest tech stocks to own over the past couple of years and its valuation now sits at around record levels, with a market cap of more than $1.3 trillion.
Meta owns some popular social media applications in WhatsApp, Facebook, and Instagram. But is the stock's current valuation justifiable, and can it go even higher, or has it reached a peak?
Why Meta Platforms could go higher
The bullish case for Meta Platforms is that with an impressive 3.3 billion daily active people, it possesses a lot of value for marketers who are trying to reach a certain target market.
And Meta's business has been booming in recent quarters. After a bit of a slowdown in its growth rate in 2022, business has bounced back with the company now generating growth rates in excess of 20%.
META Revenue (Quarterly YoY Growth) data by YCharts
In its most recent quarterly results (ended June 30), Meta Platforms' ad impressions rose by 10% year over year and its price per ad also increased by 10%. What has been even more impressive than its revenue growth has been improvement in the bottom line. Net income totaled $13.5 billion last quarter, rising by 73% year over year.
If Meta continues delivering this type of growth, it's hard to imagine the stock slowing down, especially since it's trading at relatively modest 27 times trailing earnings; the average tech stock is trading at an earnings multiple of 41.
Why the stock could struggle
Things are going well for Meta Platforms stock right now but there could be trouble ahead. The ad market can be volatile and if concerns about a recession start to rise and advertisers pull back on spending, the company's impressive growth rate could start to nosedive the way it did back in 2022. And if the government doesn't end up banning TikTok, that could throw a wrench in Meta's promising growth opportunities.
For now, the company's operations are doing well and the strong ad revenue and profits from its Family of Apps business segment (which includes Instagram, Facebook, WhatsApp, and Messenger) are able to overshadow the losses from its cash-burning Reality Labs division (which focuses on the metaverse). But spending on that continues to loom large. If the ad business slows and those profits decline, there will be more of a spotlight on the struggling Reality Labs business, which incurred an operating loss of $4.5 billion this past quarter. Meta's Family of Apps segment, by comparison, generated $19.3 billion in profit.
In the long run, there are also question marks related to privacy and whether Meta is doing enough to protect children. Dozens of states are suing Meta for collecting data on children under the age of 13 without their parents' consent. And concerns are growing about the mental health risks associated with its social media platforms. This may not sound quantifiable in terms of lost revenue but Meta has amassed a lot of bad press over the years and the attention surrounding its addictive apps isn't going away.
Should you buy Meta Platforms stock?
Meta's stock is doing well but this is also under ideal market conditions. It's investing in artificial intelligence and benefiting from that bandwagon, its ad business is also strong but that's with X (formerly Twitter) no longer being the same type of platform that it was before Elon Musk acquired it, and a looming TikTok ban is also likely keeping many advertisers away from Meta's biggest rival.
Everything is lining up perfectly for Meta Platforms right now. But the stock's fortunes could reverse quickly in a slowing ad market (if a recession hits). And while the long-term risks may not appear measurable right now, they aren't worth ignoring, either.
Meta's valuation may not seem all that expensive, but that could change if revenue and earnings numbers start to stumble. Although its share price may still climb a bit higher in the near future, this is a stock I'd avoid as the business faces an uncertain road ahead and its ability to withstand serious competition remains questionable.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.
