Discover the most innovative ‘Magnificent Seven’ stocks based on this important metric

Nvidia Attracting market attention in 2023 and so far in 2024. meta platform (meta -1.57%) It’s an equally good story, if not a better one.

In less than a year and a half, from November 2, 2022 to March 8, 2024, the meta rose an impressive 458.8%. Stock prices went from eight-year lows to all-time highs in a relatively short period of time. A lot of that is due to Meta being oversold in 2022, but the bigger story is that Meta has one of the best business models in the world.

Below are indicators of why Meta Platforms is one of the most innovative “Magnificent Seven” companies, and why it’s worth buying even with its stock at an all-time high.

Image source: Getty Images.

Investing in product improvement

On an absolute basis, Meta Platforms spends the second most money on research and development (R&D) after . alphabet. However, as a percentage of revenue, no company in the Magnificent Seven comes close to Meta, whose R&D to revenue ratio is 28.5%.

META R&D to Revenue (TTM) data by YCharts.

Part of the reason Alphabet and Meta have such high R&D costs is the nature of their businesses. Two of the biggest players in the telecommunications space are profiting from the platform. For Alphabet, those are primarily Google, Google Cloud, and YouTube. For Meta, it is driven by Facebook, Instagram, and WhatsApp.

These platforms are a cash cow, but they require some fine-tuning. And in Meta’s case, Instagram needed a major overhaul to compete with TikTok. Meta’s selloff in 2022 was largely driven by the threat of TikTok, a broad tech selloff and dissatisfied shareholders fed up with the company spending money on Metaverse and its unprofitable Reality Labs division. It got worse.

But Instagram’s improvements have worked wonders for the company. Meta estimates that over 3.1 billion people use at least one of her apps every day. The company leverages artificial intelligence (AI) through its app, and he credited AI with helping Meta’s answer to TikTok, Reels, become a huge success.

Meta has a wide moat

If you listened to Meta’s Q4 2023 earnings call, you likely heard the company talk at length about how it has been investing in AI and the Metaverse for some time and will continue to do so. But for now, it’s running a lean business and plans to keep it that way.

How is Meta able to stay so lean and invest so aggressively in growth? Simply put, it doesn’t have to spend a lot of money compared to what the platform offers.

• apple You need to manufacture and sell new phones and physical products.
• tesla I have to sell my car.
• Nvidia has to sell GPUs.
• Amazon You need to sell subscriptions or products through an e-commerce platform and book customers through Amazon Web Services.
• microsoft You need to sell software subscriptions, physical products, and manage Microsoft Azure clients.

Alphabet has a business model that most closely resembles the Meta Platform of the Magnificent Seven companies. Although the company has built a wide moat in search, its platform is more vulnerable to disruption than Meta’s.

From a pure business model perspective, there’s no better cash cow than Meta. That digital real estate has become one of the most valuable touchpoints for advertisers to interact directly with consumers based on their preferences.

Meta also has physical products such as the Meta Quest virtual reality headset. Since the company’s business does not depend on the performance of these products, these products serve as a cherry on top of an investment thesis rather than a make-or-break factor.

Meta’s ability to address the TikTok threat in a relatively short period of time is due to its primary revenue-generating business model and strong balance sheet. But cash means nothing if it’s not used effectively. The company has proven that it can effectively innovate, pivot, accept mistakes and improve.

Competition has a way of bringing out the best in even the greatest companies. And as painful as it was for Meta at the time, TikTok definitely made Instagram even more valuable to long-term investors.

Return of profits to shareholders

Meta has sufficient capital to fund its operations, research and development, organic growth and shareholder returns, and recently announced its first dividend. The company has reduced the number of shares outstanding by more than 10% over the past three years and authorized an additional $50 billion in share buybacks. (For context, Meta spent $20 billion on share buybacks in 2023.) Given that it made a whopping $43.9 billion in revenue in 2023, Meta spent $20 billion on share buybacks in 2023. The dividend can be fully covered by free cash flow (FCF).

META Revenue (Annual) Data by YCharts.

At a price-to-earnings ratio of 34x and a price-to-earnings ratio of 30.3x, Meta is not as cheap as it used to be. But it’s still not a bad deal for a fast-growing company. You would think the stock would be more expensive given the rise in meta, but the current valuation shows how much the stock could have fallen in the second half of 2022.

balanced purchase

Meta can support expensive R&D programs, which help improve the platform in the face of intense competition. Cash can fuel growth and support a large capital return program.

The company has grown with a balanced technology strategy, and its platform has proven more stable than ever. At these levels, the stock price doesn’t mean much, but there’s no denying that the business is at its peak.