Meta (META) stock slumped as sentiment turned against big tech in July, but surged after earnings. With the benefit of hindsight, it looks like I missed a golden opportunity to invest more in one of the top-performing tech stocks. However, noting its favorable earnings metrics, cash reserves, and building returns on its artificial intelligence (AI) investments, I’m still bullish on Meta even after the stock has pushed back above $500.
Meta Tops the Magnificent Seven
To support my bullish view on Meta, it’s important to understand how the company distinguished itself amid a mixed performance from other tech giants. Six of the “Magnificent Seven” stocks have reported their earnings for the last quarter, with results varying across the board. Meta, which reported on July 31, emerged as the standout performer among its peers.
While Amazon (AMZN) and Microsoft (MSFT) also surpassed earnings expectations, their results introduced a note of caution into the market. Amazon’s sales figures missed projections, which tempered the excitement around its performance. Similarly, Microsoft’s forecast of slower growth for Azure raised some red flags among investors, shifting focus from its otherwise solid earnings.
Moving on from these mixed signals, Apple (AAPL) and Alphabet (GOOGL) reported earnings beats that initially seemed promising. However, concerns about their fundamental performance lingered, causing their results to fall short of broader market expectations despite their strong financial metrics.
In contrast, Tesla (TSLA) continued to struggle, missing earnings estimates for the fourth consecutive quarter. This persistent underperformance added to the uncertainty and volatility in the tech sector.
As we await further clarity, Nvidia (NVDA), the last member of the “Magnificent Seven,” has yet to disclose its earnings. This missing piece of the earnings season puzzle leaves investors and analysts eagerly awaiting insights that could influence the final evaluation of the tech sector’s performance.
Meta’s Comfortable Earnings Beat
Meta’s impressive earnings results further substantiate my bullish thesis by demonstrating the company’s strong financial performance and resilience. Meta shares rose 9% in early trading after the earnings announcement. The company reported GAAP earnings per share (EPS) of $5.16, beating estimates by $0.40. Revenues surged 22.1% year-over-year to $39.07 billion, exceeding forecasts by $760 million.
This performance was driven by a 10% increase in both ad impressions and average price per ad, showcasing a revival in Meta’s digital advertising business, partly due to AI advancements. Additionally, the company reported a 7% year-over-year increase in daily active users, reaching 3.27 billion in June 2024.
Meta now anticipates third-quarter revenue between $38.5 billion and $41 billion, aligning broadly with the consensus of $39.18 billion while accounting for a 2% foreign currency headwind.
Meta Pumps AI Spend, Again
Meta’s impressive earnings are a big win, but let’s dig into why this is just the tip of the iceberg. A key factor driving this optimism is Meta’s significant investment in AI. Even though there were concerns about the increased AI spending last quarter, it’s beginning to show promising results.
In fact, these investments are already yielding impressive outcomes. “We had a strong quarter, and Meta AI is on track to be the most used AI assistant in the world by the end of the year,” CEO Mark Zuckerberg shared after the release. This statement highlights the tangible progress Meta is making, further fueling the positive outlook.
Building on this, the company’s AI efforts have started to pay off in more ways than one. Not only have they boosted advertising efficiency, but they’ve also led to innovations like the Meta AI assistant, which is built with Llama 3. CFO Susan Li pointed out that Meta AI is now available in over 20 countries and eight languages, showing how quickly these advancements are spreading.
Looking ahead, Meta’s commitment to AI remains strong. The company has increased the lower end of its CAPEX range for the year from $35-40 billion to $37-40 billion. With the early positive returns from these investments, this rise in spending is now seen as a strategic move rather than a risk, reassuring investors about the company’s growth trajectory.
Is Meta Stock Good Value?
When evaluating Meta’s stock, my bullish thesis revolves around its valuation. With the NASDAQ average price-to-earnings (P/E) ratio at 31.9x and the S&P 500 at 24.2x, Meta, an AI-focused tech giant with a net cash position of $39.7 billion, looks like a bargain at just 26.4x TTM earnings and 24.4x forward earnings.
Furthermore, the expected earnings growth rate aligns with this optimistic view. Analysts project a medium-term annualized earnings growth rate of 19.5%, and with EPS anticipated to surpass $30 by 2027, the stock has a price-to-earnings-to-growth (PEG) ratio of 1.25.
This PEG ratio places Meta on equal footing with Alphabet, offers a premium over Nvidia—which may be riskier due to its high near-term valuation—and is available at a discount compared to the rest of the Magnificent Seven.While a PEG ratio below one often signals undervaluation, I’m willing to be more flexible with this metric when assessing big tech firms and those with robust long-term growth prospects.
Is Meta Stock a Buy?
On TipRanks, Meta comes in as a Strong Buy based on 24 Buys, two Holds, and two Sell ratings assigned by analysts in the past three months. The average Meta stock price target is $549.35, implying a 6.5% upside potential.
The Bottom Line on Meta Stock
Meta stock still looks attractive despite pushing up from its July lows. The stock’s P/E and PEG ratios suggest the business is undervalued versus its peers and the wider market. Given its growth rate and sizeable cash reserves, I’d expect to see Meta trading at a greater premium to the S&P 500.
The Zuckerberg firm also appears to be experiencing the benefits of its AI investments, with strong gains in both ad impressions and the monetization of advertising opportunities.
