In the past couple of years, this business has won back investors in a remarkable fashion.
Meta Platforms (META 2.26%) was left for dead during the market downturn in 2022. But it has been a fantastic ride upwards since. From the start of 2023 to the end of September of this year, shares have catapulted 376% higher.
Should investors scoop up this top social media stock, which trades in record territory, today? Here are three reasons why I believe that might be a smart move for your portfolio.
Meta’s network effects
One clear reason investors should consider owning this business is because of the presence of network effects. This critical factor is precisely what underpins Meta’s economic moat, which helps it fend off existing rivals and new industry entrants, while at the same time supporting long-term success.
As of June 30, Meta counted a whopping 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 larger the apps get, the more valuable they become because there are exponentially more connections that can be made, with more content being created.
Anyone with some technical skills and capital funding could in theory launch a new social media app. But with no existing users, it would be almost impossible to attract new people to the service. This highlights just how dominant 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 the S&P 500. This metric demonstrates Meta’s impressive ability to generate adequate earnings on the money that it reinvests into 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 drive incredible financial performance over a long period of time. That’s another reason that investors should want to buy the stock.
Growth has been superb, boosted by the secular trend of digital advertising. In the past decade, Meta has posted a compound annual revenue gain of 29.7%. Given that the global market for digital ads is projected to go from $366 billion in 2022 to over $1 trillion in 2030, there is still a robust expansionary runway for Meta to take advantage of.
This is also an extremely profitable enterprise. In the past five years, the company’s operating margin has averaged 34.8%. The bottom line has been lifted by cost cuts and a renewed focus on operational efficiencies.
Meta is in a position of power because it has deep pockets and top-tech talent. The company brought in $10.9 billion in free cash flow last quarter and has $58.1 billion of cash, cash equivalents, and marketable securities. This allows the management team to aggressively invest in artificial intelligence (AI) initiatives, particularly around network infrastructure to raise capacity for computing power.
Meta’s valuation
Given Meta’s strong stock gains in the past couple of years, it’s not nearly as attractive from a valuation perspective today. Shares trade at a price-to-earnings ratio of 29.2. At first glance, that doesn’t look that compelling. But it does represent a 9% discount to the tech-heavy Nasdaq 100 Index.
The valuation looks better when viewed next to Wall Street’s outlook. The analyst community believes earnings per share can grow at a 23.6% annualized pace between 2023 and 2026. It’s not unreasonable to assume the solid double-digit gains can continue for several years after.
Meta is a top-tech company with many favorable qualities. Investors should really consider adding it to their portfolios.
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. Neil Patel and his clients have 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.
