After disappointing investors in 2022, Meta Platforms Inc. (META, Financial) delivered stellar returns in 2023 alongside the recovery of tech stocks. The company started 2024 on the right foot as well, handsomely beating Wall Street expectations for both earnings and revenue for the fourth quarter. Meta seems to be following in the footsteps of Apple Inc. (AAPL, Financial), which is evident from its newfound interest in rewarding shareholders handsomely, not just with buybacks, but also with dividends. In a surprise move, the company announced a quarterly dividend of 50 cents per share, initiating a dividend program against all odds. The company also boosted its stock repurchase authorization by $50 billion to complement the dividend. Stellar fourth-quarter earnings coupled with the company's announcement of its first-ever dividend sent the stock 20% higher following the earnings report last week.
A closer evaluation of Meta's prospects reveals it is well-positioned to grow from here and is still reasonably valued despite a meaningful expansion in valuation multiples in the last 12 months.
Margin expansion is a major bright spot
From a high of 41% in 2019, Meta's operating margin reached a trough of 28.80% in 2022 with the company's aggressive investments in the metaverse failing to deliver the desired returns. Deteriorating operating margins forced the social media giant to take bold steps to improve its profitability in 2023, starting with the launch of a new campaign named Year of Efficiency. The company's operating margin ballooned to 36.30% in 2023 with it benefiting from several positive changes it implemented over the last 12 months. This is a positive sign as Meta is now moving forward as a more agile, leaner company that is capable of aggressively investing in artificial intelligence.
Meta was among the many tech companies to focus on a lean business structure in 2023. The company ended the year with 67,317 employees compared to a total headcount of 86,482 in 2022. Despite a notable reduction in headcount, it performed exceptionally well across all of its business segments, including 16% year-over-year growth in revenue, 8% growth in family daily active people and a 28% increase in ad impressions. Meta's aggressive layoffs in the last 15 months have helped its operating performance, which is evident from the meaningful margin improvement reported for 2023.
Strategic investments to drive growth
Meta's mass layoffs should not cloud the judgment of investors when it comes to evaluating its long-term prospects. Despite a focus on efficiency gains, the company has not lost its focus on strategic investments to ensure long-term growth.
During the fourth-quarter earnings call, the company highlighted its commitment to deploying approximately 350,000 H100 chips to develop world-class computing infrastructure to penetrate the opportunities in the AI space. The massive computing power of the company will be used to improve Reels and develop AI capabilities to support the growth of Reels across Facebook and Instagram.
The company is also investing in custom silicon for specialized workloads to further accelerate the company's expansion as an AI-first social media giant. Last May, the company unveiled MTIA, Meta's first-generation AI inference accelerator, to handle content understanding, feeds and ads ranking more effectively.
Meta's investments in AI will enable it to develop and deploy advanced AI services on its platforms in the future, potentially dealing a massive blow to its rivals who are still at the infant stages when it comes to deploying AI to improve ad performance and user retention.
The company is taking a long-term approach to AI development, spending millions of dollars every quarter on developing Llama models 5,6 and 7 to emerge as a leader in the generative AI space. These AI investments will directly impact revenue in several ways going forward.
First, Meta is using AI to enhance its advertising platform. %he company has already launched Advantage+, a portfolio of solutions aimed at improving the return on investment of advertisers. This product suite allows advertisers to automate parts of the campaign creation process, including audience targeting, likely leading to efficiency gains. The company has also introduced text variation and image expansion features using generative AI to help marketers create high-quality advertisements to reach a global audience.
Second, Meta is leveraging AI to improve business messaging capabilities on WhatsApp Business. The company is testing AI-driven business support in chat to help business owners seamlessly conduct business through WhatsApp. According to management, click-to-message ads are continuing to grow and the potential integration of AI into business messaging should boost the revenue from this ad segment in the future.
Third, Meta continues to heavily invest in Reality Labs, including investments in augmented rality and virtual reality product development, which should create new revenue streams in the long run. The company's VR headset, Oculus, is already bringing in revenue, but is still at an infant stage when it comes to unlocking the true potential of the mixed-reality headset space. With additional investments in AI supporting the introduction of groundbreaking features, Meta may emerge as a global leader in the AR/VR product space in the long run.
Overall, Meta's strategic investments in AI should help its growth in the coming years.
Meta has taken a leaf out of Apple's playbook
Just over five years ago, Apple decided to pursue a net cash neutral goal when it started generating more than enough cash from operations to support investments and debt repayments. To achieve this objective, the company aggressively repurchased stock and paid dividends, rewarding long-term shareholders. For context, Apple spent an average of $37 billion per year on share repurchases between 2013 and 2018, but since then, it has spent $82 billion on stock buybacks per annum. Unlike Apple, Meta Platforms still enjoys a long runway for growth and the company is investing to expand. However, Meta also generates substantial operating cash flows ($71 billion in 2023) and the company only carries $18 billion in long-term debt. This strong financial position allows it to distribute wealth to shareholders, which is exactly what the company is doing today.
Apple's net income has grown at a compound annual rate of 10.25% between 2018 and 2023, but earnings per share grew at an annualized rate of 15.51% over the same period, aided by substantial buybacks that reduced the share count. Meta, on the other hand, is well-positioned to see strong net income growth, so aggressive buybacks will multiply earnings per share growth in the next few years. Strong earnings growth should support premium valuations.
Meta, at a forward price-earnings ratio of 23.92, is expensively valued compared to its five-year average of 22.23. This premium valuation, however, seems justifiable given the company is in better shape than ever to grow profitably, aided by its continued dominance in the social media space and the narrowing losses of the Reality Labs division. Meta's buybacks will also play a major role in boosting earnings growth, thereby allowing the company to trade at higher stock prices without a further expansion in earnings multiples.
Investors will have to monitor a few key risks, including the company's exposure to China (approximately 10% of revenue in fourth-quarter 2023) and the regulatory challenges in North America and Europe.
Takeaway
Meta Platforms stock, even on the back of a 146% gain in the last 12 months, looks reasonably priced at a time when it is enjoying a noteworthy expansion in profit margins, which allows it to invest in its future while rewarding shareholders with dividends and buybacks. Some volatility is expected in the coming months if macroeconomic conditions in China threaten Meta's short-term profits, but in the long term, the company should thrive even if its China business faces a permanent decline.
