Is Meta Stock a Buy?

Meta Platforms (NASDAQ: META) is probably the most unloved big tech stock out there. It has delivered quarter after quarter of impressive results, and has the fastest revenue growth rate of any of the hypersalers by far, yet trades at a cheap valuation and is down over 20% from highs set last October.

The real question is, is Meta's stock a value right now, or is there a good reason for it to trade at a discount? Let's take a look and see if now is the perfect buying opportunity, or if you should steer clear.

Image source: Getty Images.

Meta is using AI to transform its core business

When discussing Meta, it's important to split the company into two segments: what it is and what it wants to become. Currently, it's a social media platform that gets the majority of its revenue from advertising.

This isn't a bad business by any means, and it has built Meta into what it is today. In the first quarter, advertising generated $55 billion in revenue, nearly all of Meta's $56.3 billion total revenue for the quarter. While you may think the social media industry is saturated and can't get any bigger, Meta is becoming better with ad placement thanks to artificial intelligence (AI)-driven improvements. This helped Meta's revenue surge 33% year over year -- something any investor would be happy to see.

However, Meta is also spending a ton of money on its Reality Labs division. This includes augmented reality and virtual reality devices, alongside many of its AI bets. This is a major loss leader for the company, and it delivered a $4 billion operating loss compared to the $402 million in revenue it generated. That's pretty atrocious, but if this division can produce a meaningful piece of consumer tech that captures the public's attention, then all of these losses could pay off.

Regardless, Meta produces a 41% operating margin, so while it could be higher, it's still quite impressive. As for valuation, Meta shares trade at a cheap 19 times forward earnings.

META PE Ratio (Forward) data by YCharts

Most of big tech is in the mid- to high-20 times forward earnings range, so this is a cheap stock compared to its peers. Furthermore, the S&P 500 trades at 21.7 times forward earnings, so it's cheaper than the broader market as well.

I think Meta is a strong buy at this price point because investors are focused on the wrong thing with Meta. It's in a great position to deliver strong AI products (although it hasn't done much meaningful work in that area yet). While investors are waiting for that, the core business is doing incredibly well, and if Meta gets one of its other bets right, the stock could be primed to soar.

Keithen Drury has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.