Meta Platforms called for increased spending next year.
Not long ago, investors were not confident that Meta Platforms (META 1.60%) could revitalize its business. At the time, the number of users interfacing with its family of apps (Facebook, Instagram, WhatsApp, Messenger, and Threads) was stagnant, advertising revenue was falling, and spending on its Reality Labs division was through the roof. But that was the Meta of old; now it’s running like a fine-tuned machine.
However, does that warrant buying the stock? Or should investors be concerned that Meta will fall like the rest of the tech sector?
Investors see a direct path to profits from increased spending on AI
While the projects it’s working on in its Reality Labs (like its augmented and virtual reality headsets) division or its artificial intelligence (AI) research may grab headlines, it’s basic old advertising that drives Meta’s growth.
In the second quarter, advertising dollars rose to $38.3 billion, up 22% year over year. That’s impressive growth, considering the business’s size and maturity, but Q2 isn’t just an outlier. Meta also posted strong growth in Q1 earlier this year and is projected to produce similar levels of growth in Q3.
However, in that guidance was an all-too-familiar line that haunted Meta investors in 2022: increased spending. While management kept 2024’s full-year expense guidance the same, they noted that 2025’s spending would significantly increase due to infrastructure costs. This is directly tied to Meta’s pursuit of developing a leading large language model (LLM), which is used to power generative AI technologies. Most investors would be disappointed if this spending were on its Reality Labs side project. However, this increased spending is understandable because this is an investment in AI.
Having top-tier AI models that assist users and guide internal decision-making is table stakes for big tech today. If Meta didn’t make this investment, its ad offerings may not look as enticing as other platforms. Additionally, if Meta can innovate technologies that allow ads to be more personalized and tailored to each user, they could become more effective, driving the price per ad up and benefiting Meta in the long run.
Still, without any direct guidance from management, it’s difficult to understand how this spending increase will affect its financials. So, does the stock warrant a buy right now?
The overall market has been weak since Meta’s fantastic earnings report
The market largely cheered Meta’s report, as the stock was up 5% the day after delivering its results versus the Nasdaq-100‘s decline of 3%. That’s a significant decline for a large index, so Meta’s rise despite the backdrop of a terrible day in the market is impressive. However, due to the broader weakness in big tech and concerns that we’re already in a recession, the stock has declined about 5% since reporting.
This could give investors the opportunity to buy into the stock before it begins to rebound, but is the price right?
With the economy potentially heading into a recession, it’s good to examine Meta’s stock’s historical pricing data to see where it’s at.
META PE Ratio data by YCharts
At 23 times forward earnings and 24 times trailing earnings, Meta’s stock is priced at the low end of its historical range. Additionally, with its trailing and forward earning valuation converging on the same number, analysts believe that Meta will have almost no earnings growth over the next 12 months. This accurately reflects Meta Platforms management’s note of increased spending in 2025.
Another factor to understand is that advertising revenue generally falls in a recession, which would hurt Meta’s stock, considering that nearly all of its revenue is derived from ads. This would cause further pressure on its profits, something investors don’t want to see.
So, if you think the economy is heading toward (or already in) a recession, staying patient with the stock may be best. However, I think most investors are better off buying now because Meta will likely be a stronger company five years from now, regardless of what happens with the economy in the short term.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.
