3 Things About Meta Platforms Stock That Smart Investors Know | The Motley Fool

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The social media giant has major tailwinds propelling earnings higher right now.

Meta Platforms (META 0.96%) stock has been on a tear this year, soaring by more than 150% through early November. That rally stems from the social media giant’s accelerating sales growth, which occurred just as Meta’s cost cuts ramped up in early 2023.

The combination sent earnings and profitability higher, propelling the stock far above the wider market’s returns.

Smart investors know there’s much more to the bullish investment thesis than just those headline results. The parent of Facebook and Instagram is also making bold bets in areas like artificial intelligence (AI) and virtual reality (VR) even as it seeks to shore up its finances. With that big picture in mind, let’s take a look at three key things driving investors.

Engagement is Meta’s fundamental growth metric because the advertising business depends on a growing pool of users to keep impressions rising. The news has been stellar on this score. Meta’s daily active user base expanded at a 7% rate this past quarter, up from a 5% uptick in early 2023.

Advertising prices are improving at the same time. Sure, they are still down compared to last year. But average prices fell just 6% in Q3, marking an improvement from the prior quarter’s 16% slump. Meta increased the volume of impressions as well, which allowed revenue to jump 21% to $34 billion.

“We had a good quarter for our community and our business,” CEO Mark Zuckerberg told investors in late October.

The even better news is that Meta is squeezing much more profit out of every dollar it earns in revenue. Operating income soared to $14 billion, or 40% of sales, from 20% of sales a year ago.

Cost cuts played a huge role in that success. Meta had 66,000 full-time employees on the books in Q3, down 24% since last year.

The positive financial results extend into the cash performance as well. Investors were thrilled to see Meta generate $14 billion of free cash flow in Q3, up from $10 billion in the prior quarter. Its cash holdings have grown to $61 billion, providing ample flexibility and resources that management can direct toward hardware innovations like Quest 3.

Management is also excited about the potential for AI to boost the platform’s value for both consumers and advertisers. Video recommendations driven by the technology helped boost time spent on both Facebook and Instagram this past quarter, for example.

“AI will be our biggest investment priority in 2024,” Zuckerberg said in a call with investors.

Meta Platforms’ stock is approaching the record levels investors saw in the highest-growth phases of the pandemic in late 2021. Yet the valuation is still below those peaks. You can own shares for about 6 times annual sales, up from around 2 times sales a year ago but down from nearly 10 times sales in 2021.

That valuation could decline again, especially if advertising demand slumps due to a slowing economy. However, Meta is demonstrating that it can be highly profitable even while average ad prices fall. It’s no surprise, then, that smart investors are gaining confidence in this tech business right now.

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