Meta Platforms (META -1.22%) investors have witnessed a terrific turnaround in the stock's fortunes on the market in 2023 following last year's disappointing performance when it lost 64% of its value thanks to a slowdown in digital ad spending.
Shares of the social media giant are up nearly 160% so far this year, and investors who have missed this eye-popping rally may now be wondering if it is too late to buy the stock. After all, Meta stock is now trading at 38 times trailing earnings, which is well above its five-year average price-to-earnings (P/E) ratio of 25.
Does it make sense to buy Meta at its current valuation? Let's find out.
Meta's ad business looks ready to step on the gas
The digital ad spending market slowed down remarkably in 2022. According to eMarketer, digital ad spending increased just 8.6% last year, following a much stronger jump of 29.5% in 2021. Not surprisingly, Meta's advertising revenue dipped last year. The company earned advertising revenue of $113.6 billion in 2022 as compared to nearly $115 billion the year before.
As advertising produces almost all of Meta's top line, the company's revenue dipped in 2022 to $116.6 billion. Analysts, however, are expecting Meta to deliver $126 billion in revenue in 2023, followed by a bigger jump next year to $140 billion. One reason why Meta's top line is likely to improve considerably in 2023 and 2024 is a pick-up in digital ad spending.
According to eMarketer, digital ad spending could increase 10.5% in 2023 and 11% in 2024. Both these estimates point toward an improvement over 2022 levels when Meta had to face difficult year-over-year comparisons. However, it won't be surprising to see Meta growing at a faster pace than analysts are anticipating, especially after the launch of its new social platform, Threads.
On July 5, Meta CEO Mark Zuckerberg launched Threads, a social app built by the Instagram team that allows users to share text updates and engage in public conversations. The app allows users to share posts up to 500 characters long, and they can also include photos, videos, and links. To log in to Threads, users simply need to use their Instagram accounts, which is a smart move by Meta.
Instagram is reportedly the fourth-most-active social platform globally, and has a monthly active user base of around 2 billion. The platform ranks after Facebook, YouTube, and WhatsApp in terms of reach. Twitter, which is considered to be a direct rival of Threads, reportedly has an advertising reach of 373 million users. Threads, on the other hand, hit more than 100 million users within a week of its launch, making it the fastest-growing app on record. That is way faster than ChatGPT's adoption as OpenAI's chatbot took close to three months to hit that mark.
Given Instagram's massive user base, it won't be surprising to see Threads eclipse Twitter's count, and that could help Meta's new app attract more advertisers to its platform. Twitter generated an estimated $4.4 billion in revenue last year, an estimated 90% of which came from advertising. So Threads could become a multibillion-dollar property for Meta Platforms and help drive stronger revenue growth for the company.
At the same time, investors should note that Meta is working to integrate artificial intelligence (AI) tools into its offerings. This could open another solid growth opportunity for the company, given the growing adoption of AI in the digital advertising space.
A good deal on the stock despite its surge
As discussed, Meta stock is trading at a relatively rich valuation historically. In fact, investors could have bought the stock at just 11 times trailing earnings at the end of 2022 before its eye-popping rally began. However, Meta's forward earnings multiple of just 24 suggests that its earnings are on track to grow nicely over the next year.
Analysts expect the company's bottom line to jump 37% this year to $11.75, and Meta can hit that mark thanks to the combination of top-line growth and its focus on improving business efficiency through cost optimization. Given that Meta's forward earnings multiple represents a nice discount to the Nasdaq-100's forward P/E ratio of 29, it isn't too late for investors to buy this tech stock as it seems built for more upside thanks to new growth drivers such as Threads and AI.
