Key Points
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Meta has been experiencing incredible growth outside of North America.
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Its margins have been improving and it has also continued to grow its user count.
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A possible breakup of the company, however, could adversely impact its growth potential.
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Meta Platforms (NASDAQ: META) stock has been jumping after the company reported earnings recently. It’s now trading at all-time highs as the social media giant has continually impressed investors over the past couple of years. It has been showing strong growth on multiple fronts and has looked downright unstoppable.
But whether it can continue to be a hot buy is by no means a sure thing, as there are many question marks around the company. Here’s a look at what’s been behind the stock’s impressive performance of late, and also what risks investors should consider before buying shares of Meta Platforms.
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Image source: Getty Images.
1. Revenue has been rising fast outside of North America
The headline from Meta’s second-quarter earnings performance was that the company beat expectations as sales rose by 22%, totaling $47.5 billion, and they beat expectations of $44.8 billion. Earnings per share of $7.14 also came in far better than the $5.92 analysts were expecting.
But what was particularly surprising and impressive was where the company’s growth has been coming from. Over the past two years, advertising revenue from the U.S. and Canada has grown by a little under 42%. In other markets, the growth rate has been much higher. In Europe, revenue has risen by 56% over a two-year period and it’s up 64% in Meta’s rest of the world segment. Asia-Pacific growth of just over 42% was also slightly higher than the growth Meta experienced in the U.S. and Canada market.
Overall, there looks to still be considerable growth potential for Meta when looking at international markets, which is an encouraging sign for growth investors.
Image source: Meta Platforms’ Q2 Investor Presentation.
2. Meta is becoming much more efficient
Another great sign for investors is that Meta’s business is doing more with less. Its expenses as a percentage of revenue have been coming down sharply in the past couple of years. Its operating margin this past quarter was 43%, versus 38% in the prior-year period.
Image source: Meta Platforms’ Q2 Investor Presentation.
Meta has been utilizing artificial intelligence to make its operations more efficient and as it continues to do that, this trend may continue. Furthermore, if its margins expand, its bottom line can look even more impressive, making the social media stock appear cheaper in the future.
3. Number of daily active people continues to rise
Back in 2022, there were concerns that Meta Platforms’ business was in trouble as Facebook experienced its first-ever decline in daily users. But those fears look to be long gone as the company has now been steadily growing its user count.
Image source: Meta Platforms’ Q2 Investor Presentation.
With close to 3.5 billion daily active people who are using one of its apps (Facebook, Instagram, Messenger, or WhatsApp), it’s little wonder why the company is a top choice for marketers and ad spend. While it’s not easy to continually add users when the numbers get this high, Meta has been able to do just that, demonstrating how truly unstoppable its business has been in recent years, or so it may seem.
Risks investors can’t afford to ignore
Meta’s business has looked unstoppable but that doesn’t mean it doesn’t come with risks. There is still an antitrust battle looming over the business that could result in the loss of two of its most highly prized assets: Instagram and WhatsApp. They are particularly popular among younger audiences and if a breakup occurs, that could be a big loss for Meta’s business. And right now, investors don’t appear to be pricing in that risk.
Another issue is that while user count has been rising, a report from The Wall Street Journal earlier this year found the company took a lax approach to getting scammers off its platforms, and that it has effectively become a hub for fraudsters. According to an analysis from 2022, as much as 70% of new advertisers were either promoting scams or selling illegal or low-quality goods.
These are potentially serious concerns that investors shouldn’t overlook. While the business is doing incredibly well, if its numbers are being inflated due to bad actors on its platforms, then that could lead to significant issues down the road.
Should you buy Meta Platforms’ stock today?
As of Thursday’s close, Meta’s stock has risen by 32% since the start of the year. It’s trading at a forward price-to-earnings multiple of 28, based on analyst estimates. Its incredible profit growth is impressive and is a big reason why the stock continually looks cheap.
But I wouldn’t rush to buy the stock, at least not until there’s more clarity about what happens with Instagram and WhatsApp, and if a breakup ends up taking place. And I’m also wary about its user growth, and whether scams and fake accounts could be contributing significantly to its growth. As good as Meta’s results have looked in recent quarters, I’m not convinced the business is as unstoppable as it appears to be, as there could be trouble ahead.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.
