The stock of Meta Platforms in the last two years represents the quintessential example of volatility investors need to endure and opportunities to pounce upon,  when it comes to raking in super-normal returns in quality stocks.

From a high of $384 in September 2021, the stock crashed to a low of $88 in November 2022 and has risen all the way up to $475 now, and hovering around its all-time highs. During this wild ride, at bl.portfoliowe had recommended our first buy on the stock in February 2022 when the stock had fallen to $230 levels. We weren’t certain that was the bottom, but were confident that was an attractive price/valuation to enter one of the world’s foremost global technology companies with a long-term perspective.

The stock continued to trend down in 2022 as macro factors such as Russia-Ukraine crisis, high inflation, unprecedented pace of interest rate hikes by the Fed as well as company-specific factors like poor revenue growth at Meta due to slowing economy, privacy changes in iOS/Apple products impacting ad targeting by Meta, took a toll on its performance. This, combined with Mark Zuckerberg’s unrelenting focus on metaverse and ploughing in billions of dollars of cash into the business without any clear payoffs amidst these issues, spooked investors, resulting in the stock tumbling into double-digit levels in November 2022 — levels last seen in the year 2015.

While there was extreme pessimism on the stock then, it also presented one of the best buying opportunities in one of the world’s best technology companies, which is why we doubled down on our buy call on the stock when it was trading at $91 in bl.portfolio edition dated November 6, 2022: ‘Meta Platforms – Five Reasons to buy Facebook when investors are pessimistic’.

Investors who had bought on our recommendation in November 2022 would have made multi-bagger returns of a little over 5 times by now in 14 months, while those who had bought in February 2022 would have made 2x returns. What should investors do now?

Meta Platforms’ fundamentals remain quite solid and as things stand now we believe it will be a leading player in the global AI space. However, the upside in the stock will not be linear and will likely be volatile as the last two-three years have indicated. For reasons explained below, we recommend that investors book partial profits and lock in on some of the profits.

For one, such multi-bagger returns are unlikely to repeat for ultra mega cap companies trading at over trillion dollars in  market cap. For those who have made the returns, it is too good not to harvest some of the gains. The profits can be used to diversify into competing AI plays (we shall recommend in the upcoming editions).

Two, Meta is now trading at one-year forward PE of 22.6 times, which is a 20 per cent premium to its five-year average valuation of 18.8 times. It being a company that, for now, makes its entire revenue from advertisement, which is a highly cyclical revenue stream, the valuation may not expand much from here. For the premium to expand, AI business needs to start generating revenues and at a large scale with good profitability. This appears to be a few years away for now.

Three, Meta has already been successfully using its AI prowess in its internal operations. For example, its headcount had decreased by 22 per cent in 2023, while revenue increased 15 per cent and, more importantly, operating profit increased 62 per cent. This reflects a lot of optimisation in multiple layers of its business executed successfully with the help of AI.

Hence, internal efficiencies may have already been maximised and, going forward, the company will require better macro economics to boost its revenues and profitability. While CY24 is expected to remain good with consensus estimating 17 per cent revenue growth, this is well captured at current levels with stock trading at premium to historical levels. At the same time, there are risks to economic growth from stubborn inflation in the US, high interest rates and volatile bond yields.

For investors who missed the rally, we recommend waiting for better entry points. Since the time it listed in 2012, Meta has been a volatile stock with multiple bouts of significant corrections. Revenue volatility, meta verse investments, data leaks, regulatory scrutiny, broader market factors, etc, have all provided multiple attractive entry points in Meta in the last 12 years and are likely to repeat, going forward as well. Investors can consider entering next time such events play out.

Recent performance

Post its Q4 results released on February 1, the stock of Meta is up over 20 per cent as investors got excited by its solid beat and raise quarter. Revenue came in 3 per cent above consensus, while EPS came in 8 per cent above, reflecting operating efficiencies. Core business — Family of Apps (Facebook, Instagram, WhatsApp, Facebook Messenger) — remains strong with user engagement continuing to improve (albeit at slower rate given saturation). Dailly Active People (DAP – registered user who logs into one of the Family of Apps) increased 8 per cent to 3.19 billion.

While peer Snapchat saw its stock crater 30 per cent post its results due to impact of macro factors, Meta has been consistently improving its performance. Besides its large scale and better execution, company’s AI driven tools for advertisers have resulted in Meta gaining a larger pie of digital advertising. Products like Advantage+ that generates ads automated according to specific objectives of marketers, Shop ads that has been boosting revenues for e-commerce players are examples. Company is also experimenting with newer AI driven products.

On the negative side, losses in Reality Labs (metaverse) division continue. In 2023 it rerted operating losses of $16 billion and this is likely to increase to near $20 billion in 2024. The payoffs are not clear, but investors appear to be fine with it for the time being as core business is trending well and company has committed to operating efficiencies.

On the AI front, the company is continuing to invest heavily. The company has guided for capex of $30-37 billion, out of which a good chunk will be for AI-related computing infrastructure and its open source LLM platform – Llama.