I’ve said it before, and I’ll keep saying it: Buying world-class businesses on sale is an investment strategy that pays off. The only question is a matter of when such decisions will yield results. Sometimes, it can take years for the market to recognize a buy thesis, while other times, the results can be very quick. Having soared 68% so far in 2024, Meta Platforms (META) is a case of the latter type. That raises the question I pose in the headline: Is the stock still buyable after such a monstrous rally? After reviewing Meta’s third-quarter results released in late October, I believe the answer is yes.
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The social media giant’s operating fundamentals point to a thriving company. Meta’s valuation is also reasonably attractive. That’s why I’m initiating coverage with a Buy rating.
Meta Surpassed Expectations in Q3
Meta further validated my bullish thesis with the release of its third-quarter earnings results on October 30, 2024. The company’s revenue surged 18.9% over the year-ago period to $40.6 billion during the quarter and surpassed analysts’ consensus of $40.2 billion. User base growth across Meta’s social media platforms drove ad impressions 7% higher in Q3 2024. Additionally, improved ad efficiency helped the average price per ad rise 11% over the year-ago period.
The company’s diluted EPS soared 37.4% year-over-year to $6.03 for the third quarter, well ahead of the Street’s estimate of $5.22. Disciplined cost management helped total expenses grow by just 13.9% over the year-ago period to $23.2 billion. That fueled a 470-basis point expansion in the net profit margin to 38.7% and drove the earnings beat.
More Significant Growth Should be on the Way for Meta
Meta Platform also looks set up to continue delivering impressive growth to shareholders in the years ahead, which bolsters my Buy rating. Meta’s diluted EPS is expected to rise by 52.6% in 2024 to $22.69. Another 11.9% increase in diluted EPS to $25.40 is the consensus for 2025. Further analysts estimate an additional 13.4% jump in diluted EPS to $28.79 in 2026.
For one, the global digital advertising industry outlook is very encouraging. Market research firm Cognitive Market Research expects global digital ad spending to rise by 9% annually from an estimated $621.5 billion in 2024 to top $1.1 trillion in 2031. This is driven by the expectation that global adoption of smartphones, tablets, and laptops will continue to rise.
Meta is arguably positioning itself well to keep capitalizing on this sizable industry growth, thanks to the network effect. As more people sign up for platforms like Threads, the user base grows. An expanding user base leads more people to join because their friends are on the platform. That makes such platforms more enticing to advertisers, which keeps digital ad spending moving higher.
According to Chairman and CEO Mark Zuckerberg, Threads reached nearly 275 million monthly active users in Q3. Signups also continue to grow by more than a million users a day. Meta’s investments in artificial intelligence (AI) are showing results, too. An AI-driven feed and video recommendations have resulted in an 8% increase in the time spent on Facebook and a 6% increase on Instagram through the first three quarters of 2024.
Substantial Dividend Runway and an Incredible Balance Sheet
Meta’s dividend is another aspect of the stock that supports my Buy rating. At a glance, Meta’s 0.3% dividend yield comes in well below the communication services sector’s average yield of 1.9%. This is primarily because of its very low payout ratio. Based on the $2 in dividends per share and the diluted EPS consensus of $22.69, the payout ratio for 2024 is likely going to be below 9%.
That gives Meta plenty of room to raise the payout ratio in the years to come. This provides it the flexibility to grow its dividend at a rate materially faster than the diluted EPS. That’s why I believe dividend growth could be very robust in the foreseeable future.
Additionally, Meta’s superb financial positioning is another aspect that provides leeway to return capital to shareholders. As of September 30, 2024, the company’s net cash and marketable securities position was $42.1 billion. That led Meta to generate $1.1 billion in net interest income through the first nine months of 2024. This is what supports the company’s AA- corporate credit rating from S&P Global (SPGI) on a stable outlook.
Meta Stock Is Still a Decent Value
Even with Meta’s massive year-to-date gains, the stock’s valuation is sufficient to warrant a Buy rating, in my view. That’s because Meta’s forward P/E ratio of 23.2x is well below its 10-year average multiple of 30x. Due to the law of large numbers that the company is contending with now, I believe a P/E ratio of around 26x or so would represent fair value for the stock. As a result, anticipated diluted EPS growth is dipping to the low-teens level.
That’s still quite strong, though, and this would suggest Meta is moderately discounted at the current share price.
Is META Stock a Buy, According to Analysts?
Shifting to Wall Street, analysts have a Strong Buy consensus rating on Meta. Among 44 analysts, 40 have assigned Buy ratings, three have issued Hold ratings, and one has assigned a Sell rating in the past three months. The average META stock price target of $662.62 implies a 12% upside potential from the current share price.
Conclusion
Meta is a trillion-dollar juggernaut that’s poised to benefit from further integration of AI into its business in the years ahead. That should continue to drive double-digit diluted EPS growth annually for many more years. The dividend initiated earlier this year has admirable growth potential. Best of all, Meta stock can still be purchased at an arguably discounted valuation on a forward basis. All these factors support my bullish stance on META stock.
