Is It Too Late to Buy Meta Platforms Stock?

Meta Platforms (META 20.32%) appears to be back in the good graces of Wall Street after its stock price recently surpassed all-time highs set back in mid-2021. Investors piled back into the stock following the release of the company’s fourth-quarter and full-year 2023 report. The introduction of a dividend also seemed to improve the sentiment surrounding this stock.

On the other hand, the rising price (it’s up 212% in the past year) has made Meta stock increasingly expensive, and investors may lose interest in the dividend when they see what it yields.

While such factors are unlikely to prevent Meta’s long-term growth, they could contribute to returns that fail to beat the S&P 500 — at least in the near term. Here’s why.

Meta’s 2023 results were impressive

The social media giant’s latest results show why many analysts characterize Meta Platforms as a “Magnificent Seven” stock. Meta managed to recover from its metaverse-related misstep, increasing more than 300% since its October 2022 low. This has taken its market cap back above $1 trillion, a feat few tech stocks have accomplished.

Meta dominates social media with its ownership of Facebook, Instagram, Threads, and WhatsApp. About 3.2 billion people use at least one of its apps daily, a figure no other social media company can come close to matching.

For the full-year 2023, Meta reported $135 billion in revenue, a 16% increase from year-ago results. At the same time, its expenses rose just 1%. This resulted in net income of just over $39 billion, an improvement of 69% from year-ago levels.

As already mentioned, Meta investors will now receive a dividend. The first quarterly payout of $0.50 per share ($2 per share yearly) will become payable on March 26. Given the 2.57 billion outstanding shares, the dividend will cost Meta just under $5.2 billion annually. Fortunately, the company generated $43 billion in free cash flow in 2023, an amount that can easily cover the cost of the payout.

Meta’s now priced at a premium

Unfortunately, income-focused investors are likely to lose enthusiasm for the payout when they discover its dividend yield is just over 0.4%, well under the 1.4% average for the S&P 500. At such levels, investors may treat the payout as an afterthought rather than a reason to own shares. In Meta’s defense, part of why the payout yields so little is that the stock price has appreciated so much in such a short time.

The 15-month run-up in the stock has made it look quite frothy. At a price-to-earnings ratio (P/E) exceeding 35, the earnings multiple is approaching five-year highs, a dramatic turnaround from when it reached single digits in the fall of 2022.

Furthermore, Meta management delivered an outlook that was mixed, at best. For Q1 2024, it forecast revenue of $34.5 billion to $37 billion. That points to a healthy 25% revenue growth rate at the midpoint. However, it declined to publish a revenue outlook for all of 2024, instead revealing to investors that 2024 expenses would rise due to higher infrastructure costs, wage expenses, and more operating losses for its metaverse segment, Reality Labs. Such expense growth makes it unlikely for 2024 profits to rise as much as they did in 2023, assuming they increase at all.

Stand pat on Meta Platforms’ stock

Meta released strong results and showed it’s moved on from earlier missteps into the metaverse. It’s the dominant social media company and has robust free cash flow, so the company’s stock price should grow in the longer term.

However, new investors may want to wait for a more opportune time to buy in. And income investors are likely to feel underwhelmed by the dividend when they see how much it yields. Additionally, rising expenses and the lack of revenue transparency for 2024 point to uncertainty. With Meta’s P/E ratio near a five-year high, it may be worthwhile to hold out for a lower valuation before buying this stock.