In the past five years, shares of Meta Platforms (META -5.68%) have soared 164%. That gain is impressive, but it has been an extremely volatile ride. Nonetheless, Meta has outpaced the Nasdaq Composite index's total return of 130% during that time frame.
Past returns are no guarantee of future results. But that won't stop investors from believing that the good times can continue. With that being said, where will this "Magnificent Seven" stock be in five years?
Connecting the world
Meta is known for its popular family of apps, which includes Facebook, Instagram, WhatsApp, and Messenger. Combined, they have a jaw-dropping 3.24 billion daily active users. This is a massive sum that equals 40% of the global population. However, that figure increased by 7% in Q1 on a year-over-year basis.
This segment raked in $133 billion of revenue in 2023, accounting for 99% of the company's total. It's an extremely profitable business line, with the operating margin coming in at 47% last year before expanding to 49% in the first quarter of 2024.
If we estimate what Meta will look like in 2029, I'm fairly certain that these social media apps will still be primarily responsible for the company's financial performance. There's no reason to believe otherwise. Given Meta's incredibly powerful network effects, competing apps face almost insurmountable barriers to entry and barriers to scale. In other words, it's difficult to see anything disrupting its dominant position.
And at a fundamental level, human beings will still want to find ways of connecting with each other. This is what Meta facilitates.
Meta's optionality
There is a chance, no matter how small, that Meta's business slowly transitions over time. Founder and CEO Mark Zuckerberg is bullish on the prospects of the metaverse, which is housed in the company's Reality Labs division. He even went so far as to say that he wants 1 billion users in the metaverse one day.
Meta creates hardware and software within Reality Labs, but financial success has been hard to achieve. The segment requires massive investment to build out the technology. This is why operating losses are so high, amounting to more than $15 billion on an annualized basis in Q1. Demand has also been unimpressive, with revenue totaling just $2 billion in the past 12 months.
However, Meta is positioned to be a leader in artificial intelligence (AI) over the long haul, whether that means finding innovative ways of connecting its user base or better serving advertising customers. With free cash flow totaling $43 billion in 2023, coupled with cash, cash equivalents, and marketable securities of $58 billion, the company has unrivaled financial resources to follow through on its ambitions.
Sizing up expectations
Meta's competitive advantages and pristine financials are truly impressive characteristics that should place this dominant business on anyone's watch list. However, before automatically buying the stock in the hopes that it will rise in the next five years, it's important to consider the current valuation.
Shares trade at a forward price-to-earnings ratio of 25.4. This is much more expensive than the dirt cheap multiple of around 10 that the stock sold for about a year and a half ago. But I still believe the valuation is compelling today.
According to Wall Street consensus analyst estimates, Meta is projected to grow revenue and earnings per share at compound annual rates of 14.1% and 20.7%, respectively, between 2023 and 2026. Should these gains continue for longer than that forecast period -- and I think they will -- then the stock is set up to continue rewarding shareholders over the next five years.
