Is Outperforming Meta Platforms Stock Still a Good Buy Right Now?

Shares of Meta Platforms (META) are on a tear, rising more than 50% year-to-date, and easily eclipsing the S&P 500 Index’s ($SPX) 18.2% gain. The company’s strong performance continued after its impressive Q2 earnings report on July 31, with the shares up 12% since the release - pushing Meta stock’s total gains to around 77% over the past year.

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The catalyst behind this growth is Meta's ability to generate solid advertising revenue despite ongoing macroeconomic challenges. Meta’s stronghold in the social media world, increased user engagement across its platforms, and strategic cost-cutting measures have contributed to boosting its financials and investor confidence.

Additionally, Meta’s focus on enhancing its artificial intelligence (AI) capabilities has been a game-changer. The company has already reported improvements in ad delivery driven by AI and has invested billions in the technology, which further strengthens its long-term growth prospects.

But after such a substantial rise in its stock price, can Meta keep up the momentum? Let’s dive into the pros and cons to determine whether Meta stock is a buy right now.

The Bull Case for Meta Stock

• Engagement and Monetization: Meta’s success is largely due to its ability to create engaging user experiences and monetize them effectively. Its "Family of Apps," which includes Facebook and Instagram, continues to grow. Instagram's Reels, for example, is expanding quickly, thanks to improvements focused on original content and new creators. Similarly, Facebook's unified video player and ranking systems are expected to enhance engagement and growth opportunities for short-form video content.
• Advancements in AI: Meta's focus on AI extends beyond just improving engagement. The company is leveraging AI models to optimize ad delivery and enhance marketing performance. These advancements are helping advertisers to get better results without flooding users with more ads, which is driving revenue growth for the company. The company’s Advantage+ suite of solutions is getting solid adoption, further boosting Meta’s revenue potential.
• Long-Term Growth Drivers: Looking ahead, Meta’s investments in AI and its longer-term projects, like Threads and generative AI, are expected to sustain its growth trajectory. These initiatives are designed to drive future engagement and revenue, solidifying Meta’s position as a leader in the digital advertising space.

Challenges on the Horizon for META

Despite its impressive performance, Meta faces several challenges that could impact its stock in the near term, primarily:

• Slowing Growth: While Meta reported solid 22% revenue growth in the second quarter, that pace is expected to slow in the third quarter of 2024, as the company faces tough year-over-year comparisons. Notably, Meta’s performance last year got a boost from China-based advertisers and strong Reels impression growth. As a result, the revenue growth rate is expected to slow slightly sequentially.
• Rising Capital Expenditures (CapEx): Meta plans to spend significantly in 2024, with capital expenditures projected to reach between $37 billion and $40 billion. Most of this spending will go toward AI research and product development. Although these investments are crucial for long-term growth, they could pressure Meta’s short-term financials, potentially affecting its stock price. Meta also noted that infrastructure costs will drive up expenses next year, which may cut into profitability.
• Reality Labs Losses: Meta’s Reality Labs segment, which focuses on virtual and augmented reality, is expected to see increased operating losses in 2024. While the company is investing heavily in developing new products and expanding the VR/AR ecosystem, this segment is still far from being profitable.

What Does This Mean for Investors?

While META stock has already surged considerably, the company’s focus on AI, and its ability to drive user engagement and ad revenue, are compelling reasons to consider investing in Meta now. However, the anticipated slowdown in growth, high capital expenditures, and increased losses in Reality Labs could temper short-term returns.

Wall Street analysts are bullish on Meta, with the stock earning a consensus rating of “Strong Buy.” The average 12-month price target on META is $575.93, implying just over 8% upside potential from current price levels.

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For those looking to invest in Meta, it’s essential to adopt a long-term perspective. The company’s strategic investments and innovations are likely to support future growth, but investors should be prepared for potential short-term volatility and slower growth compared to the recent past. Meta stock looks promising, but patience will be essential for those looking to maximize their investment.

On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.