It has been an excellent few years for investors in social media giant Meta Platforms (NASDAQ: META). Meta stock has grown by no less than 279% over the past five years.
That sort of growth certainly grabs my attention.
So, could now be the time to add Meta stock to my portfolio?
Strong position in a massive market
Meta owns a number of social media platforms that have extensive reach in a massive market, such as Instagram and Facebook. On top of that, it is trying to move forward in an evolving technology landscape with its investments in areas like augmented reality.
That part of its strategy remains to be proven. But the tried and tested social media business continues to be a big money spinner for Meta.
Last year, the business grew revenues by more than a fifth. Net income soared by 59% to $62bn.
The company’s current market capitalisation of $1.5trn may seem large, but those earnings help put it in perspective. Meta trades on a price-to-earnings (P/E) ratio of 24.
That does not look cheap to me, especially given last year’s strong growth in earnings. If that turns out to be a one-off rather than a new norm, the prospective P/E ratio is even higher.
But I reckon Meta has some assets that could help the business to perform well for decades to come.
For starters, it has a global installed user base in the billions. It also benefits from network effects, meaning that as users spend more time on platforms like Instagram, it becomes more attractive for other users, essentially leading to a virtuous circle.
Meanwhile, Meta continues to spend heavily on areas like generative AI. It remains to be seen whether these sorts of efforts outside its core business will be costly blunders or a master stroke of foresight.
If it goes well, that could be a spur for further growth in the value of Meta stock.
I won’t be buying in
That risk sits uneasily with me, especially as I feel the current Meta stock price offers me an insufficient margin of safety.
But it is not the only risk I see.
I reckon the halcyon days of social media are over and both users and regulators are now better understanding some of the harm it can cause. In that sense I see the social media industry now as akin to cigarettes in the 1960s. Over time, I expect it to become more heavily regulated, eating into profits for firms like Meta and also potentially leading to the breakup of very large networks.
I see Meta’s business as creating a lot of social harm alongside more positive aspects, so just as some people choose not to buy tobacco shares, I would not like to own Meta shares.
Even if I wanted to, the current valuation looks high to me. So, it is safe to say I will not be investing!
