The stakes are high as Meta Platforms prepares its first quarter earnings report for late Wednesday. The Facebook parent company's Meta stock has gained nearly 40% this year and 130% over the past 12 months, pushing its market cap back above $1 trillion.
But the market has been turbulent in recent weeks. Meta stock slid on Friday as part of a broader tech sell-off. Earnings results on Wednesday could test what has been a quick turnaround story for Mark Zuckerberg's social media giant.
"We're talking about a pretty significant shift in a relatively short period of time," Third Bridge analyst Scott Kessler told Investor's Business Daily. "From a restructuring, layoffs at the end of 2022 to making 2023 the 'Year of Efficiency,' where we saw the growth rate really accelerate."
Now the big question is how Meta can sustain that growth and keep its run going. Here are some of the factors analysts will be watching for in Wednesday's report:
Meta Stock: Watching Spending
Analysts project Meta will post sales of $36.14 billion, up 26% from the same period in 2023, according to FactSet. That would mark a fifth straight quarter of revenue growth accelerating. Earnings are projected to rise 95% to $4.32 per share.
One number to watch: Meta's costs. Meta last week announced the latest version of its large language model, called Llama, as well as upgrades for its Meta.ai chatbot. It is part of a broader generative AI push from Meta. At the same time, the company continues to invest in its metaverse-focused Reality Labs division.
All that comes with big costs. Meta is redesigning its data centers, creating custom computing chips and buying hundreds of thousands of chips from Nvidia to power its AI ambitions.
In its fourth quarter report in February, Meta raised the high end of its capital expenditures guidance for 2024 to a range between $30 billion and $37 billion (compared to $30 billion to $35 billion previously). CFO Susan Li told analysts that the company was spending to support its work in AI.
Raising its spending expectations again could raise some eyebrows. But Wall Street might also shrug off that spending, so long as Meta keeps its revenue on the right track.
"If the company is generating significant growth and exceeding expectations, then it seems the investing public has a greater level of patience with concurrent notable increases in not just capex, but (operating expenses) as well," Kessler said.
Meta stock struggled, Kessler added, when spending continued to rise rapidly in 2022 but growth slowed.
Booming Ad Business
On that note, Meta's advertising business will be closely watched. For its fourth quarter, digital ad sales contributed 97% of Meta's revenue.
For the first quarter, ad sales are expected to drive 98% of revenue. Analysts project advertising sales will grow 26% to $35.4 billion, according to FactSet.
"Factors leading to strong growth include the Advantage+ suite of ad products, Reels revenue, and core Facebook, which continues to perform strongly even at 20+ years old," wrote Debra Aho Williamson, chief analyst at the research and advisory firm Sonata Insights, in an earnings preview Friday.
Bernstein analyst Mark Shmulik said there is a potential risk from a slowdown from advertisers in China, which accounted for about 10% of Meta's total ad sales last year. Further, expectations have "steadily crept up" for Meta since its fourth-quarter report in February, Shmulik said in a report Thursday. Investors are now looking for Meta to deliver sales growth toward the top of its guidance for the quarter.
Meta Stock Risk: A Netflix Sequel?
Shmulik, like most analysts heading into the report, is confident Meta can meet the high marks. But there are risks that come with heightened expectations. Evercore ISI analyst Mark Mahaney pointed to the market response Netflix received last week. The video streaming giant's shares sank 9% on Friday in response to its earnings report the night before, despite results that beat expectations.
"META is up even more going into its print, though it arguably also has more valuation support," Mahaney wrote in a client note on Monday. "Basic point is that a clear beat-and-raise may be required for Meta to simply maintain its current price level. The bar is high."
On the stock market today, Meta stock is up 2% at 491.84 in morning trades. The IBD Stock Checkup tool shows Meta stock with a Relative Strength Rating of 96 out of a best-possible 99, indicating the stock has outperformed most of the market over the past 12 months.
Further, Meta stock is on several IBD stock lists, including Tech Leaders, IBD 50, Big Cap 20 and the premium IBD Leaderboard list.
