The Factors Fueling Meta’s Stock Rally

META Platforms stock (NASDAQ: META) has experienced a significant surge, driven by investor optimism surrounding rising user engagement and consistently strong quarterly results. This year alone, Meta is up 16%, significantly outperforming the broader NASDAQ index, which has risen by 2%.

Looking at a slightly longer timeframe, Meta’s outperformance becomes even more apparent. Since early 2024, Meta’s stock has delivered a remarkable 97% return, climbing from approximately $350 to around $700 per share. In contrast, the NASDAQ index saw a 31% increase over the same period.

This impressive 97% growth in Meta’s stock can be attributed to three key factors:

• a 54% rise in its Price-to-Sales (P/S) ratio, increasing from 6.9x in 2023 to 10.6x currently;
• a 26% increase in the company’s revenues, growing from $135 billion to $170 billion over this period; and
• a marginal 1% reduction in total shares outstanding, bringing the total to 2.6 billion.

We’ll delve into the specifics of these factors. While META stock has had a good run, if you want an upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception. Separately, see – Is Oracle Stock A Buy At $190?

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What’s Driving Meta’s Revenue Growth?

Meta Platforms is the world’s most popular social network that helps people connect with family and friends. The company makes money primarily through advertising, which it provides to advertisers by targeting specific demographics based on information posted by users on its platforms.

Meta Platforms’ revenue growth lately can be attributed to rising ad impressions as well as an increase in the average price per ad. Also, Meta’s family daily active people (DAP) has risen 7.5% from 3.19 billion in 2021 to 3.43 billion now. The company is benefiting from its AI push, targeting more advertising. The company also plans to use AI to generate more content.

Not only has the company’s sales risen in the last three years, its net income margin has expanded from 29% in 2023 to 39% now. Meta’s shares outstanding also declined by 1% over this period, thanks to the $63 billion the company spent on share repurchases since 2023. Higher revenues clubbed with margin expansion and fewer shares resulted in the company’s bottom line of $25.58 now, up 72% from $14.87 in 2023.

What’s Behind Rising Valuation Multiple?

Investors are increasingly bullish on Meta’s stock, and for good reason. The company is seeing a healthy rise in both ad impressions and the average price per ad, which directly boosts its sales.

A major driver of this optimism is Meta’s aggressive push into AI. This isn’t just a buzzword for Meta; AI is directly contributing to higher advertising revenues by:

• Boosting user engagement across its platforms.
• Enabling more effective ad targeting, which means advertisers get better results and are willing to pay more.
• Enhancing overall ad effectiveness, leading to increased revenue per user and higher conversion rates for businesses running campaigns. This is crucial, as advertising accounts for the vast majority of Meta’s income.

Meta is deeply integrating generative AI across its entire social media ecosystem. This includes innovative features like the Meta AI virtual assistant for chat, advanced image generation, and powerful photo editing tools. Furthermore, its Llama AI model is rapidly attracting a large user base, further cementing its AI leadership. These powerful growth factors, combined with Meta’s improving profitability—demonstrated by a solid 39% net income margin—have significantly boosted investor confidence. As a result, the company’s Price-to-Sales (P/S) ratio has expanded notably, from 6.9x trailing revenues in 2023 to 10.6x now.

But Does META Stock Have Any Room For Growth?

Surely, META stock has fared well since the beginning of 2024. However, the increase in META stock has been far from consistent. Returns for the stock were 23% in 2021, -64% in 2022, 194% in 2023, and 66% in 2024. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 — indicating that META underperformed the S&P in 2021 and 2022.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around trade wars, rate cuts and geopolitical tensions, could META face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months — or will it see a strong jump?

From a valuation standpoint, we believe Meta’s stock is currently fully priced. Our estimate places Meta Platforms’ valuation at $702 per share, which is very close to its current market trading price. The stock is presently trading at 10.6 times its trailing revenues, notably higher than its four-year average Price-to-Sales (P/S) ratio of 6.8x.

While a modest increase in Meta’s valuation multiple seems justified given its recent robust advertising growth, investors should also consider the inherent risks. It’s still uncertain precisely how significant a boost AI will provide to the company’s long-term earnings growth. This uncertainty makes Meta’s continued, aggressive investments in AI a potential risk factor. For context, Meta has already spent $77 billion in capital expenditure since 2023, and it plans to spend an additional $64 to $72 billion this year alone on AI infrastructure.

While META stock looks fully valued, it is helpful to see how Meta Platform’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

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