In the past week, Meta (NASDAQ:META) stock has risen over 20% due to better-than-expected sales growth and Zuckerberg announcing a stock dividend. 

With this major development and Meta stock at an all-time high, it’s time to assess where Meta stock can go from here, from both the positive and negative angles. 

Positive for Meta Stock

First, Meta is only paying $0.50 in dividends each quarter, amounting to a meager 0.43% annual dividend yield. However, there is room for that to grow. 

Analysts project dividends could double to around $4 in 2029, which it could easily cover, given its free cash flow is projected to more than double. 

In addition, a major benefit of companies issuing dividends is that it reduces insider selling pressure. Mark Zuckerberg, for example, could earn over $692 million just in dividends this year. Other insiders will still be able to earn dividends well into the millions. 

Committing to pay dividends means Meta would be more fiscally responsible. This is because shareholders do not take dividend cuts lightly, meaning that Meta is only announcing dividends because it has confidence in its cash flow statement going forward to grow dividends. 

Meta Fundamentals Unchanged

As a result of the dividend announcement, the stock blew past its previous all-time high to over $475 a share. 

If we look at its fundamentals, it is warranted given that revenue jumped over 15% while total operating costs increased by barely a percentage because of the mass layoffs. 

However, if we look at the stock from a longer point of view, we find that 2022 was really an anomaly year for Meta and that its fundamentals were only returning to its previous performance. 

For example, gross margins were 80.7%, where it had been 81.9% in FY 2019. Net income margin was only 19%, when in FY 2020 that was at 33.9%. Moreover, revenue growth for Meta used to always be in the 20% range, whereas it only increased 15.9% YoY from a bad year. 

Meta Stock valuation Worries

At its current P/E ratio of 35.95x, it is extremely close to its valuation in 2020 when it traded at 37.1x, when it was the tech boom. 

Though Meta is a high-quality company, the run-up in 2023 means investors are certainly paying a premium for it 

Here is why that’s dangerous given Meta’s reliance on ad revenue. 

It is said that close to 95% of Meta’s revenue comes from ads, meaning it is reliant on the business’s marketing budget. In 2022, the fear of a recession sent Meta’s stock down the drain as Facebook ad spending drastically decreased.

This is because ad spending returned as the economy picked up and AI optimization made ads more effective. 

A possible mild recession in 2024 could crush analyst estimates for Facebook if companies pull back on spending. We remember that the effects of rising interest rates don’t come immediately, and many are predicting a mild recession in 2024. 

My thoughts on Meta

Overall, dividends are a very good thing for Meta stock. For me, “Magnificent 7” stocks seem risky right now due to their runup in 2023.

For Meta, its reliance on ad revenues combined with its high valuations means its stock price could easily tumble if ad spending decreases due to macroeconomic reasons.

On the date of publication, Michael Que did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.