Meta Platforms, after crashing nearly 80% over 14 months, has been on an absolute tear since it hit bottom last November. The turnaround for Meta stock began when the parent of Facebook and Instagram announced its first round of job cuts.
A second round of job cuts in March fueled another leg up for Meta stock and big upward earnings revisions, particularly for 2024.
There may still be more room for spending cuts. Yet the bull case for Meta stock now depends on a return to revenue growth, and there are some positive signs on that front. So is Meta stock a buy?
Meta Earnings On Tap
Meta's Q1 results are due after the close on Wednesday. Analysts expect Meta earnings per share of $2.02, down 26% from a year ago. That would be an improvement over roughly 50% year-over-year earnings declines the prior two quarters. Revenue is expected to slip 1% to $27.6 billion.
From a sales perspective, Meta has been pretty much running in place for the past year, but it appears to be gaining traction. Analysts expect sales growth of 5% for the full year and 11% in 2024. With Meta cutting jobs and spending, those revenue gains should translate into strong earnings growth.
Here's what has analysts gaining confidence in Meta's outlook, apart from cost cuts.
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Apple, Economy Hit Ad Prices
Recall that Meta's sales growth began to fall off a cliff by early 2022, as Apple's privacy change caught up with it. Starting with the iOS 14.5 update in the spring of 2021, Apple began requiring apps downloaded through the App Store to let users opt in or out of tracking their activity across third-party sites. With the bulk of users opting out, Meta lost the data needed to help businesses narrowly target advertising to consumers likely to have an interest in their products or services.
In February 2022, Meta revealed just how big of a revenue hit Apple's privacy shift would deliver: $10 billion in 2022 alone.
The diminished effectiveness of advertising on Facebook and Instagram came amid an e-commerce slowdown, as the boom in pandemic-era consumption shifted from goods to services.
The result was a downturn in ad prices. Ad prices in 2022 averaged 16% less than in 2021, with a 22% decline in Q4 from the year-earlier quarter.
Meta Gets Back On Track
But recent news suggests Meta has figured out how to replace the revenue hit delivered by Apple with two strategies: applying artificial intelligence to predict consumer interest as a substitute for tracking user activity, and deploying alternative ad formats that bring consumer-business interactions within Meta apps, so Meta doesn't need to depend on tracking to third-party sites.
On the Q4 earnings call, CEO Mark Zuckerberg credited AI with helping boost ad conversions by 20% vs. a year earlier. That means consumers are more likely to click on the ads, and Meta advertisers are generating higher returns on their ad spending.
Meanwhile, click-to-message ads, which open up a WhatsApp or Messenger chat with businesses, have reached a $10-billion annual rate, Zuckerberg said on the Q4 call. Shop ads, which open up directly in a merchant's Facebook- or Instagram-hosted e-commerce site, have reached a run rate of hundreds of millions of dollars, Javier Olivan, Meta's chief operating officer, said in a March 9 investor presentation.
Olivan said that click-to-messaging ads are a big deal in emerging markets, highlighting a General Motors campaign in Brazil that saw 5,000 car sales begin with WhatsApp conversations.
Reeling In TikTok
The other big revenue headwind for Meta has stemmed from its own strategic shift. Back in August 2020, Instagram launched Reels short-form videos to take on TikTok, whose surging popularity had caught Meta, then still known as Facebook, off-guard.
But competing against TikTok required Meta to go in reverse before moving forward, for two reasons. First, Meta had no ad formats tailored to short-form videos, and it has taken some time to learn what formats can work without detracting from user experience. Second, Facebook and Instagram members were used to primarily seeing content from accounts they followed, whereas TikTok users expected to be served up viral videos.
By late 2021, around the time Facebook changed its name to Meta, the company decided it would have to become more like TikTok. Yet that assured near-term pain for ad sales as Meta served up more and more content that was, at least to start, pretty much ad-free.
Zuckerberg said that, by the end of this year, around 30% to 40% of content users see will be recommended, rather than from followed accounts, and that percentage will keep growing. However, Meta has gradually ramped up the ad content on Reels short-form videos, and now 40% of Meta clients advertise via Reels.
By late 2023 or early 2024, Zuckerberg says, Meta will reach the point where shifting more content to Reels will no longer be a money-loser.
Meta Stock Analysts See Positives
Piper Sandler's biannual teen survey published in April saw 37% rate TikTok as their favorite social media app. That was down one point from last fall. Meanwhile, 23% named Instagram, up 3 points.
"We find TikTok's decline in leadership as encouraging and a testament to product improvements at Meta," wrote Piper analyst Tom Champion.
Jefferies analyst Brent Thill wrote in an April 5 note that he sees Meta revenue growth accelerating in the second half of 2023. He cited higher engagement due to AI efforts, more upside from the "underappreciated" click-to-messaging business and easy year-over-year comparisons. Thill hiked his Meta stock price target to 251 from 220, keeping an outperform rating.
Generative AI Surprise Coming?
In a March 24 note, Barclays analyst Ross Sandler predicted that Meta might be the biggest beneficiary of generative AI applications among consumer-oriented internet names.
So far there's been little news on that front. Meta's AI uses to date have involved ad functions and recommending content to users. However, Zuckerberg said on the Q4 call that Meta's new product focus this year centers on generative AI.
"I think you'll see us launch a number of different things this year," he said. More detail could come Wednesday.
Meta Stock
Meta stock dipped 0.7% to 211.46 in early Monday stock market action. Last week, Meta stock slipped 3.9%, its first down week since before Meta announced a second round of 10,000 layoffs on March 14.
That announcement helped spark Meta stock, which broke above a 197.26 buy point on March 15.
That earned Meta stock entry into the IBD Leaderboard portfolio of elite stocks.
Meta Platforms hit an 11-month high at 222.11 on April 14, up 152% from its Nov. 4 low.
Last week's action saw Meta stock pull back to its 21-day exponential moving average. In bullish market environments, when a leading stock finds support at its 21-day line, then makes a convincing move higher, that can be a rewarding time to jump aboard.
Yet while the market uptrend remains intact, it's not a rip-roaring bull rally. A pullback to the 50-day or 10-week line or a new consolidation might offer a safer entry after such a huge run.
Be sure to read IBD's The Big Picture each day to stay in sync with the market's underlying trend and what it means for your trading decisions.
Bottom line: Meta's fundamentals are tracking in the right direction, but Meta stock isn't currently a buy.
