Meta Platforms Shines. Is the Stock Still a Buy?

Until recently, investors were not sure Meta Platforms (FINISH 0.44%) could revive its business. At the time, its family of apps (Facebook, Instagram, WhatsApp, Messenger, and Threads) were stagnating in user numbers, ad revenue was declining, and expenses for its Reality Labs division were sky high. But that was the old Meta; now it runs like a fine-tuned machine.

But does that justify buying the stock? Should investors worry that Meta will collapse like the rest of the tech sector?

Investors see direct path to profits from increased AI spending

While the company’s Reality Labs projects (like augmented and virtual reality headsets) or artificial intelligence (AI) research may grab headlines, it’s really the underlying advertising that’s driving Meta’s growth.

In Q2, ad dollars rose to $38.3 billion, up 22% year over year. That’s impressive growth given the size and maturity of the company, but Q2 is no exception. Meta also saw strong growth in Q1 earlier this year and is expected to generate similar levels of growth in Q3.

However, there was an all-too-familiar thread running through that guidance that has haunted Meta investors in 2022: increased spending. While management maintained the same full-year spending guidance for 2024, it noted that spending for 2025 would increase significantly due to infrastructure costs. This is directly related to Meta’s pursuit of developing a leading large language model (LLM) that is used to power its generative AI technologies. Most investors would be disappointed if this spending was for its Reality Labs side project. However, this increased spending is understandable, since this is an AI investment.

Having the best AI models to guide users and internal decision-making is the name of the game for big tech today. If Meta hadn’t made this investment, its advertising offering might not have seemed as enticing as it does on other platforms. Furthermore, if Meta can innovate in technologies that allow for more personalized and tailored ads for each user, those ads could become more effective, which would increase the price per ad and benefit Meta in the long run.

Still, without any direct guidance from management, it’s hard to see how this spending increase will impact the financials. So, is the stock a buy now?

The overall market has been weak since Meta’s fantastic earnings report

The market largely welcomed Meta’s report, with shares rising 5% the day after the results were announced compared to Nasdaq-100down 3%. That’s a significant drop for a major index, so Meta’s gains against the backdrop of a terrible day on the market are impressive. But on broader weakness in big tech and fears that we’re already in a recession, shares are down about 5% since the filing.

This may give investors the opportunity to buy shares before they start to rise, but is the price right?

With the economy potentially heading into recession, it is worth examining historical Meta stock price data to see where it stands.

META PE data by YCharts

At 23 times forward earnings and 24 times trailing earnings, Meta stock is trading at the lower end of its historical range. Furthermore, with trailing and forward earnings valuations approaching the same number, analysts believe Meta will see almost no earnings growth over the next 12 months. This closely mirrors Meta Platforms management’s note of increased spending in 2025.

Another factor to understand is that advertising revenues typically decline in recessions, which would hurt Meta stock given that almost all of its revenue comes from advertising. This would put further pressure on earnings, something investors don’t want to see.

So if you think the economy is headed toward (or already in) a recession, it’s best to stay patient with the stock. However, I think most investors would be better off buying now, because Meta will likely be a stronger company five years from now, regardless of what happens to the economy in the short term.

Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keithen Drury holds positions in Meta Platforms. The Motley Fool holds and recommends positions in Meta Platforms. The Motley Fool has a disclosure policy.