Year to date, Meta Platforms (NASDAQ:META) stock continues to outperform the rest of the Magnificent Seven, up 7.72%, 144 basis points clear of Nvidia (NASDAQ:NVDA).
If it were all about wealth, Nvidia’s CEO and co-founder would be the winner. His wealth increased by $63.4 billion in 2024, giving him the most significant move year-to-date on the Bloomberg Billionaires Index. He is ahead of Meta CEO and co-founder Mark Zuckerberg, whose wealth has risen by $47.8 billion in 2024, making him the second-biggest mover of the year.
Meta stock gained in Thursday trading because Raymond James analyst Josh Beck, who has a Strong Buy rating, raised his target price by $25 to $550, 10% higher than where it’s currently trading.
There is no question that META stock is on a roll. The question investors have is whether it can stay that way.
I’ll address the pros and cons of Meta stock and decide whether to Buy or Sell it.
META Remains Attractive
Two things are driving META higher.
Its digital advertising business, AI, and large language models generate significant revenue for the company today, and the latter should generate significant revenue tomorrow.
The company reported its Q1 2024 results at the end of April. Revenues were nearly $37 billion, 27% higher than a year ago. CNBC noted it was the company’s biggest quarterly growth since 2021.
I most recently discussed META at the end of March. It was one of three communications services stocks I recommended. I felt that the cost cuts it made last year, combined with a focus on the core business and putting the metaverse on the back burner, were wise.
Now, shareholders are reaping the benefits.
As of March 31, Meta’s free cash flow was $12.53 billion, almost double the $6.91 billion in Q1 2023. That free cash flow growth made it easy for Meta to introduce a 50-cent quarterly dividend with the March payment.
In 2024, based on 2.63 billion in shares outstanding, it will pay out $5.26 billion in dividends. In the first quarter, it generated more than half that in free cash flow.
Meta’s awash in cash.
Meta Platforms Stock Has Come Too Far, Too Fast
From its November 2022 lows around $90, META stock is up 447% through June 6. That’s some move over the past 20 months. Over the same period, Microsoft (NASDAQ:MSFT), the largest of the Mag 7 by market capitalization, has seen its shares double.
At the end of 2022, Meta had a price-to-sales ratio of 2.79x. Today, it’s more than 3x that multiple with a P/S ratio of 9.15x. Microsoft’s P/S ratio at the end of 2022 was 8.88x. Today, it’s 13.38x, 1.5x higher.
Given the growth of its stock over the past twenty months, it makes sense that they’re both higher.
However, the renewed commitment to invest big dollars, specifically in AI, has spooked investors. The concern is that the commitment to cost containment has only lasted a year. If it goes back to its big-spending ways, that will put a big dent in its free cash flow, which it uses to pay the new dividend.
Analysts don’t seem too concerned about Zuckerberg’s comments about spending.
“The advertising revenue growth trajectory is as expected … and top-end of the 2Q guidance range point to 22% year-over-year (growth) against tougher compares. Who would have thought that was possible a year ago?” Investor’s Business Daily reported Bernstein analyst Mark Shmulik’s comments about Q1 2024.
The company continues to seek additional revenue streams beyond its core ad business. Ads account for 98% of its revenue, so it needs to diversify.
The Bottom Line on Meta Platforms
While Meta’s valuation is high, its ability to generate massive amounts of free cash flow makes it an attractive bet to overcome its lack of diversification. AI could be the success for the company that the metaverse wasn’t.
Meta Platforms stock is a long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
