Meta Platforms (META -10.56%) owns a portfolio of social media platforms including Facebook, Instagram, and WhatsApp. If you don't use any of them yourself, you almost certainly know someone who does, given that they serve more than 3.7 billion users every month.
But after a series of product missteps, the company seemingly lost its status as a tech-sector darling, and its stock price suffered a 76% peak-to-trough collapse between 2021 and 2022. That sparked action among Meta's leadership team, and its financial report for the fourth quarter showed dramatic improvement.
Many investors have rushed back into the stock. Here's why you should, too.
Mark Zuckerberg has shifted his focus
2022 was the year of the metaverse. Well, actually, it wasn't, but Meta Platforms was heavily focused on its efforts to build the technology that it hopes will support persistent immersive 3D virtual worlds. It burned $13.7 billion on the project throughout the year, and CEO Mark Zuckerberg actively showcased the company's progress on social media.
Investors, though, grew increasingly frustrated as Meta kept that focus on speculative virtual worlds while the financial performances of its existing family of social media apps suffered amid a slowing economy.
To make matters worse, ByteDance's TikTok has grown into a formidable competitor, pulling advertising dollars away from platforms like Facebook and Instagram.
But great managers answer the call, and that's what Zuckerberg did in the second half of 2022. Meta committed to efficiency by trimming costs across the board and laying off 11,000 employees. It also focused on developing its artificial intelligence (AI) capabilities to power new features like Reels so it could take the fight to TikTok.
The company says Reels is beginning to monetize at an increasing rate, but there's more in the pipeline to look forward to. Meta also launched Candid Stories, which is designed to drive more engagement on Instagram's highly successful Stories feature by borrowing a concept from the fast-growing BeReal social media platform. Plus, it released Notes, which is meant to help spark conversations within Instagram's messaging feature.
The results were clear in Meta's fourth-quarter report. Revenue of more than $32.1 billion was down year over year, but it was still the best quarterly number of 2022 and up 16% from the third quarter. Product improvements generally result in more advertising dollars, and that theme should carry through into 2023.
Meta's earnings might have bottomed
Higher revenues and lower costs can only result in one thing: more profit. Meta's net income was shrinking rapidly throughout 2022, but it ticked higher in the fourth quarter. That news provided some welcome relief to investors and signaled a potential bottom.
Meta's capital expenditures came in at $9.2 billion in Q4, which was still 66% higher than in the prior-year quarter. On the earnings call, Zuckerberg told investors that the effects of some of the company's cost-cutting efforts -- among them, its layoffs -- might not be tangible until Q1 2023. That's a key takeaway because it means Meta's net income could grow substantially in the coming quarters purely on the basis of its reduced costs.
On the revenue side, businesses should regain their appetite for advertising spending as the economy picks up steam. Plus, if the new feature set across Instagram and Facebook (especially Reels) begins to monetize at better rates (as the company expects it will), net income could also get a boost.
Investors, therefore, might see a windfall on the profitability front in 2023 as revenue continues to grow while costs continue to shrink.
Meta Platforms stock is still a buy here
At this point, Meta Platforms stock is up by 114% from its 52-week low. But it's still down 49% from its all-time high, and trading at a discounted valuation relative to the rest of the technology sector (as represented by the Nasdaq-100 index).
Based on Meta's 2022 earnings per share of $8.58, its stock trades at a price-to-earnings (P/E) ratio of 22.1 as of this writing, which is 16% below the Nasdaq-100's P/E of 26.3.
If that's not enough, Meta is returning a significant amount of money to shareholders through its share-repurchase program. It bought $27.9 billion worth of its own stock during 2022, and despite having $10.9 billion still available under its existing authorization, it just announced it was adding authorization for another $40 billion in buybacks. That should support Meta's stock price throughout 2023.
Based on the company's renewed focus on its core platforms and its commitment to managing costs, Meta might be one of the best stocks to buy this year, even for those who are getting in after its recent surge.
