Over the last decade, FAANG stocks represented the pinnacle of tech investing. But after a terrible 2022 in which many of them lost significant value, some wondered if their run was over. 2023 marked a sharp reversal of this trend and many FAANG stocks regained their status as great investments.
The group consists of the following stocks:
- Facebook (now known as Metaplatforms (META 2.88%))
- Google (now known as alphabet)
None of these five companies had a better 2023 than Meta, whose shares rose around 170% in 2023. The next best performer (Amazon) gained about 75%, and the worst (Apple) saw shares rise nearly 50%. So while none of the companies in this group had a bad year, none come close to Meta Platforms’ performance.
But has the stock risen to the point where it won’t have a great year in 2024? Let’s take a look.
Meta Platforms is a story of two segments
Meta Platforms consists of two business segments: Family of Apps and Reality Labs. Its previous name, Facebook, was a clear indicator of the company, although there were also other social media platforms such as Instagram, WhatsApp, Messenger and Threads. However, due to CEO and founder Mark Zuckerberg’s desire to develop the metaverse, the company changed its name to reflect this vision.
The products and editions in Meta’s Reality Labs segment reflect that vision, even if the results weren’t particularly pretty.
So far in 2023, Meta Platforms has generated around $95 billion in revenue and $30 billion in operating profit, which is pretty good. But when you break down where that revenue and profit comes from, you get a better picture of the company.
|Family of apps
Apparently the family of apps is keeping the lights on for Meta, and Reality Labs is just a dream. But that doesn’t tell the whole story either, as Reality Labs reported its lowest third-quarter revenue in two years. This shows that the market’s interest in the Metaverse and augmented or virtual reality is quickly waning, which does not bode well for Meta’s plans.
But if you are a Meta Platforms investor, you should kind of forget about Reality Labs as Zuckerberg is determined to make this space a reality.
Instead, you should focus on the app family because the results are exceptional.
Continued increases in profitability make the stock appear cheap
Meta’s social media platforms generate the majority of their revenue from advertising, which wasn’t good business in 2022 as many companies cut their advertising budgets to prepare for an economic recession in 2023 that many predicted. However, this has now not become a reality, companies are returning to the various platforms to advertise in force.
After hitting its lowest point in the first quarter of this year, Meta’s advertising revenue posted solid quarterly growth numbers and reached a new all-time high in the third quarter. With the fourth quarter being a historically strong month (due to holiday advertising), Meta investors can expect more growth.
But what will it look like in 2024? An average of 50 analysts are forecasting revenue growth of 13%, which is respectable for a company of Meta’s size. However, earnings per share (EPS) are expected to rise dramatically in 2024.
Due to the weak advertising market, Meta was not optimized for profits in early 2023 (and Q4 2022). As a result, profit margins fell.
Now, if Meta can maintain its 34% profit margin and generate $138 billion in revenue (as Wall Street forecast), the company should generate a net profit of about $47 billion after returning to previous levels level has recovered. That would increase Meta Platforms’ value to around 18 times expected earnings.
In comparison, Meta stock looks cheap S&P 500 21x forward earnings valuation of the index. I would say that Meta is a much better company than many of the companies in the S&P 500, so buying it at a cheaper price than the index as a whole is a great bargain.
So will Meta be the best performing FAANG stock in 2024? I’m not sure, but given its advertising growth and low valuation, there are good reasons for it to be the top choice.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has held positions at Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, and Netflix. The Motley Fool has a disclosure policy.