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The average return of the S&P 500 over the long term is about 10% per year. So, many times, when a stock returns 40% or more within a year, investors will immediately throw up their red flags. Some will sell, and others refuse to buy, but looking solely at the stock's return is a terrible way to judge whether it's a buy.
If you do that, you'll miss out on many of the market's biggest winners: Nvidia and Super Micro Computer have had an amazing run since the start of 2023; yet, if you sold when you were up 40%, you missed out on massive, portfolio-changing returns.
Meta Platforms (NASDAQ: META) is in this boat as well. The stock is up 40% in 2024 and over 300% since the start of 2023. But despite that success, I think it still has room for more.
Meta's advertising business is keeping the lights on
Meta Platforms is likely better known by its old name: Facebook. Its primary business is advertising, which is done through its Family of Apps: Facebook, Instagram, WhatsApp, Messenger, and Threads. In 2022, the stock was beaten down because it was burning cash by heavily investing in its Reality Labs division, which focuses on next-generation technologies, such as augmented reality (AR), virtual reality, and the metaverse.
Back then, these were mostly luxury gaming technologies that didn't really serve a purpose. But with artificial intelligence (AI) proliferation, CEO Mark Zuckerberg's vision is becoming a bit clearer.
Meta is working on a game-changing AI called Ego, which will eventually integrate into AR glasses. This could be used for tasks like teaching people how to cook or communicating with those who don't speak the same language as us.
If this endeavor succeeds, Meta's stock could become an absolute rocket ship and easily add billions in sales.
However, as this moonshot division develops products, the advertising business is holding steady. In the fourth quarter, Meta posted record ad sales, with $38.7 billion in revenue (up 24% year over year). With Meta converting 54% of that revenue into operating profits, it is an incredible cash-generation machine. The Reality Labs division burned $4.6 billion of those profits in pursuit of its goals, but that still leaves an incredible $16.4 billion (a 41% operating margin) left over for investors.
These profits are added to Meta's ever-growing cash stockpile, which sits at around $65.4 billion as of the end of Q4. With only $18.4 billion in long-term debt on the balance sheet, it has plenty of cash on the sidelines to do whatever it wants.