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Meta Platforms (META) stock is up 147% in the past year and yesterday hit a 52-week high. It is the second-best performing stock in the S&P 500 (SPY) stock in 2023, trailing only Nvidia (NVDA) which has almost tripled this year.
Life has come a full circle for Meta investors as the stock was the worst-performing FAANG stock of 2022 with losses of 65%. Nothing seemed to go right for Meta in 2022 and investors were spooked by its falling revenues, narrowing profit margins, and the steep rise in losses of its Reality Labs business which is building the metaverse.
As Meta stock sagged, Altimeter Capital which is among the company’s shareholders, wrote an open letter to Meta CEO Mark Zuckerburg calling upon the company to tighten its belts and cut down its expenses and metaverse investments.
Meta Stock Is Rising as Zuckerburg Pushes for “Efficiency”
Zuckerburg has defended the company’s metaverse investments and sees the business as key to Meta’s long-term success. However, soon after the explosive letter from Altimeter Capital’s CEO Brad Gerstner, Meta started working on lowering its cost base and announced mass layoffs. The company announced the second round of layoffs this year and has laid off a quarter of its workforce – which in percentage terms is the highest among FAANG peers.
Zuckerburg has described 2023 as the “year of efficiency” for Meta and looking at the price action, markets seem to be loving the company's cost-cut actions. Notably, Meta now expects its total 2023 expenses to be between $86 billion to $92 billion – which is significantly below the $94 billion to $100 billion that it forecast originally.
Meta’s Q1 2023 earnings also impressed markets as the company reported its first YoY rise in revenues after three consecutive quarters of decline.
More recently, the stellar response to its new Threads platform has charged up bulls. The Twitter competitor reached the milestone of hitting 100 million users in five days – eclipsing the previous record held by ChatGPT by a really wide margin.
Meta Platform has already seen significant repricing as is evident in its 2023 price action and the key question here could be whether there is more heat left in the rally as Meta stock has more than tripled from its 2022 lows.
Why Meta Still Looks a Good Stock to Buy
I believe Meta is still a reasonably good stock to buy for the following reasons.
- The worst of the slowdown is over for Meta and analysts expect its revenues to rise 8.5% in 2023 and 10.9% in 2024. Importantly, its earnings growth in these years is expected at 21.8% and 25.6% respectively – thanks to its massive cost cuts.
- I believe there is still an upside to these earnings estimates as Threads starts to gain traction and Meta begins to monetize the user base. Its monetization of Reels on Instagram has also improved and might increase further in the coming quarters.
- The company has launched generative AI features for advertisers and Zuckerburg sees AI as a key short-term driver for Meta. I believe AI would help Meta better monetize its user base.
- While a section of the market is apprehensive about Meta’s metaverse investments, I believe it could add significant value over the long term.
- Meta has seen a valuation rerating and its forward PE multiple has risen to 23x but the PEG ratio is still around 1.1x which looks reasonable. While the valuations might not look outright cheap, they aren’t too exorbitant either.
Meta stock forecast: Most analysts are bullish
Analysts’ sentiment towards Meta has also improved this year and in June Cathie Wood of ARK Invest bought Meta shares for the first time since 2021 – including in her flagship ARK Innovation ETF (ARKK).
Wall Street is also quite bullish on the stock and analysts rate Meta’s stock a Strong Buy:
Of the 38 analysts that cover Meta, 30 rate it a Strong Buy, 3 a Moderate Buy, 4 a Hold, and 1 a Strong Sell.
Meta’s current stock price is currently above its mean target price of $281.89. However, I believe that’s because analysts’ ratings can tend to lag the price action – which has admittedly been quite steep and sudden in Meta’s case. I believe more analysts could raise Meta’s target price after its Q2 2023 earnings release.
Key risks Meta investors need to watch out for
Meanwhile, there are some risks that Meta investors need to watch out for. Firstly, regulators globally are getting wary about data privacy and Meta is especially facing troubles in the EU where it hasn’t even launched Threads yet, apparently over data privacy-related issues.
Secondly, I believe there is little scope for further multiple expansion for Meta and the stock’s price action would be dependent on earnings growth. While the global digital ad market has shown signs of stabilization, things might worsen if we head into a recession.
All said, the risk-reward for Meta looks quite balanced and I find it a decent buy at these price levels.
On the date of publication, Mohit Oberoi had a position in: META , SPY , NVDA , ARKK . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
