Nvidia captured the market's spotlight in 2023 and so far in 2024. But Meta Platforms(NASDAQ: META) is just as good -- if not a better story.
In less than 1 1/2 years -- between Nov. 2, 2022 and March 8, 2024, Meta went up a staggering 458.8%. The stock went from an eight-year low to an all-time high in a relatively short period. A lot of it was due to Meta being oversold in 2022, but the bigger story is that Meta has one of the best business models in the world.
Here's the metric that shows why Meta Platforms is the most innovative "Magnificent Seven" company and why it could be worth buying, even though the stock price is the highest it's ever been.
Image source: Getty Images.
Investing in product improvements
On an absolute basis, Meta Platforms spends the second-most money on research and development (R&D) behind only Alphabet. But as a percentage of revenue, no Magnificent Seven company comes even close to Meta, which has an R&D-to-revenue ratio of 28.5%.
Part of the reason Alphabet and Meta have such high R&D expenses is the nature of their businesses. The two largest companies in the communications sector profit from their platforms. For Alphabet, it's mainly Google, Google Cloud, and YouTube. For Meta, it's driven by Facebook, Instagram, and WhatsApp.
These platforms are cash cows but take fine-tuning. And in Meta's case, Instagram required a major overhaul to combat TikTok. The threat of TikTok was largely responsible for Meta's sell-off in 2022, compounded by a broader tech sell-off and disgruntled shareholders who were tired of the company spending money on the metaverse and its unprofitable Reality Labs segment.
However, Instagram's improvement has worked wonders for the company. Meta estimated it has over 3.1 billion people who use at least one of its apps every day. The company leverages artificial intelligence (AI) through its apps, and AI was a big part of making Meta's answer to TikTok -- reels -- a resounding success.
Meta has a wide moat
If you listened to Meta's Q4 2023 earnings call, you probably heard the company talk at length that it has been investing in AI and the metaverse for some time and continues to do so. But now it operates a lean business and plans to keep it that way.
How can Meta invest so aggressively in growth while also staying lean? Simply put, it's because it doesn't need to spend a lot of money relative to what its platforms provide.
Apple has to make and sell new phones and physical products.
Tesla has to sell cars.
Nvidia has to sell GPUs.
Amazon has to sell subscriptions, products through its e-commerce platform, and book clients through Amazon Web Services
Microsoft has to sell software subscriptions, physical products, and manage Microsoft Azure clients.
Alphabet has the closest business model to Meta Platforms of the Magnificent Seven companies. It has built a wide moat in search, but its platforms are more vulnerable to disruption than Meta's.
Purely from a business model standpoint, there is arguably no better cash cow than Meta. Its digital real estate has become one of the most valuable touchpoints for advertisers to interact directly with consumers based on their preferences.
Meta has physical products, too, like the Meta Quest virtual-reality headset. Its business isn't reliant on the performance of these products, so they act as a cherry on top of the investment thesis rather than a make-or-break factor.
Meta's ability to address the threat of TikTok in a relatively short period is largely due to its cash-cow business model and strong balance sheet. But cash would mean nothing if Meta didn't use it effectively. The company proved it can effectively innovate, pivot, accept its mistakes, and improve.
Competition has a way of bringing out the best in even great companies. And although it was painful for Meta at that moment, TikTok arguably made Instagram even more valuable to long-term investors.
Rewarding shareholders
Meta has enough money to fund its operations, R&D, organic growth, and return money to shareholders and recently announced its first-ever dividend. It has reduced its outstanding share count by over 10% in the last three years and authorized an additional $50 billion in share repurchases. (For context, Meta spent $20 billion on share buybacks in 2023.) It can fully fund future buybacks and the dividend with free cash flow (FCF), considering it earned a staggering $43.9 billion in 2023.
Meta's price-to-earnings ratio of 34 and price-to-FCF ratio of 30.3 aren't nearly as cheap as they used to be. But it's still not a bad deal for a fast-growing company. Given Meta's rally, you'd think the stock would be far more expensive, but its current valuation shows just how beaten down it was in late 2022.
A balanced buy
Meta can support an expensive R&D program, which can help improve its platforms in the face of stiff competition. It can fuel growth with cash and support a sizable capital-return program.
The company has blossomed into a balanced tech play, its platforms proving stickier than ever. The stock isn't a steal at these levels, but there's no denying the business is at the top of its game.
Should you invest $1,000 in Meta Platforms right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
