Meta Platforms (NASDAQ: META) is the best-performing ‘Big Tech’ stock this year (not counting Nvidia). Year to date, it’s up nearly 100%. Now as a long-term investor, I’m generally very bullish on Big Tech. However, I don’t own any Meta stock. Should I buy it for my ISA now? Let’s discuss.
Incredible turnaround
Let me start by saying that CEO Mark Zuckerberg has done a great job of turning the company (and the share price) around this year.
Six months ago, this was a stock that no one wanted to touch. At the time, Zuckerberg was plowing billions of dollars into the company’s metaverse project. As a result, earnings and free cash flow were evaporating.
With institutional investors dumping the stock in droves on the back of the company’s deteriorating financials, it got to the point where Altimeter Capital CEO Brad Gerstner – one of the biggest names in the tech investing world and a long-term investor in Meta – was forced to write an open letter to Zuckerberg, urging him to reduce spending.
In his letter, Gerstner advised that Meta should:
- Reduce its headcount expenses by at least 20%
- Reduce annual capital expenditure by at least $5bn
- Limit investments in the metaverse to no more than $5bn per year.
“Meta needs to re-build confidence with investors,” wrote Gerstner. “In short, Meta needs to get fit and focused,” he added.
Zuckerberg appears to have taken Gerstner’s advice.
This year, Meta has slashed jobs and focused on becoming more efficient. It has also shifted its attention to artificial intelligence (AI).
And the results speak for themselves.
For the first quarter of 2023, the company posted net income of $5.7bn, 21% higher than the $4.7bn posted for Q4 2022. Meanwhile, earnings per share came in at $2.20, comfortably above Wall Street’s estimate of $2.03.
Additionally, the company provided a better-than-expected revenue guidance for Q2. Zuckerberg attributed the healthy guidance to the company’s focus on AI, which he said is helping to boost traffic to Facebook and Instagram and earn more in advertising sales.
On the back of these Q1 results, around 30 brokers raised their price target for Meta stock.
So clearly, the company is in better shape than it was six months ago. In the words of Gerstner, it’s now “fit and focused”.
Better opportunities elsewhere?
Having said that, I have reservations about buying Meta stock today.
For a start, it’s no longer cheap. With analysts forecasting earnings per share of $11.70 for 2023, the forward-looking price-to-earnings (P/E) ratio here is about 20. I don’t see a lot of value at that multiple.
Secondly, I like the business models of some of the other Big Tech companies more than Meta’s. Alphabet, which trades at a similar valuation, is a good example.
Alphabet provides services that most of us would struggle to live without (Google, Google Maps, Google Drive, etc). By contrast, Meta’s products (Facebook, Instagram, etc) are far more discretionary in nature, in my view.
Alphabet is also a more diversified business. For example, it has a streaming business, a cloud business, a digital healthcare business, and an autonomous vehicles business.
So for now, I am going to leave Meta stock on my watchlist. All things considered, I’d rather buy more Alphabet stock than invest in Meta today.
