Source: PaxForex Premium Analytics Portal, Fundamental Insight
Believe it or not, Meta Platforms stock is up more than 70% for the year. That's well ahead of the 7.5% growth in the S&P 500 over the same period. With such an incredible start to the year, Meta should be doing well, shouldn't it?
In reality, that's not quite the case. In fact, Meta reported a 4% year-over-year decline in fourth-quarter earnings, and the current consensus analyst calls for another decline in the first quarter (we'll find out Wednesday whether that's how the quarter turned out). So what caused the stock to rise so sharply despite such a weak business performance?
The colossal rise in the stock is largely due to two reasons: cheap valuations at the beginning of the year and aggressive cost-cutting by parent company Facebook, an effort that investors believe will boost profits.
Looking at the first reason Meta stock rose, the stock started the year with a price-to-earnings ratio of about 10, the kind of ratio investors typically set for a company from which they don't expect much growth in the long run. That's a shockingly low valuation, given that analysts expect double-digit growth in the company's annual earnings per share over the next five years.
The stock's recent surge has made its value more in line with analysts' expectations for earnings growth. In other words, one could argue that the stock has adjusted to a more rational valuation. Meta stock is currently trading at 25 times trailing 12-month earnings and 22 times forward earnings.
The second major reason for Meta's growth this year is the company's cost-cutting efforts. Meta CEO Mark Zuckerberg said his top management theme for 2023 includes "a year of efficiency." "We ended last year with difficult layoffs and restructuring of some teams," Zuckerberg explained during the company's fourth-quarter earnings report. "When we did that, I clearly said it was the beginning of our focus on efficiency, not the end."
The cost reductions at the end of 2022 and early 2023 are likely to lead to significant earnings growth during the year, which will help support the stock's current valuation.
While we're parsing out the main reasons for the soaring stock price, it's also worth noting that the company has continued to post extremely disappointing results since 2021. The stock is down 44% from its all-time highs of September 2021 and 37% from the end of 2021. That compares to a 13% decline in the S&P 500 since the end of 2021.
But there is one good reason why the stock has not yet fully recovered: Meta's business is not yet out of the crisis. There is still considerable uncertainty about the company's long-term margin profile and even its longevity. The volatility of the social media company's cost structure over the past few years makes it difficult to understand how earnings will change over the long term.
In addition, the significant negative impact that Apple's changes in ad tracking and measurement have had on Meta's business in recent years has shown how dependent the company's apps are on distribution partners. Can Meta's business avoid similar disruptions in the future?
Of course, the stock price increase is a big win for Meta shareholders. But it also raises the stakes for the company to do exceptionally well going forward. Despite the rapid rise in the stock price recently, there's no guarantee that the levels at which the stock traded in 2021 will appear on the horizon in the near future.
Investors should look to see if management can provide shareholders with more information about the company's long-term margin profile and the sustainability of its business when Meta presents its first-quarter results on Wednesday.
As long as the price is above 197.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 212.38
- Take Profit 1: 220.00
- Take Profit 2: 235.00
Alternative scenario:
If the level of 197.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 197.00
- Take Profit 1: 189.00
- Take Profit 2: 179.00
