Derick Hudson
Meta Platforms, Inc. (NASDAQ:META) just had its worst day since Oct. 27, 2022, losing 10.6% in a major selloff after the social-media company opened its books for the first quarter.
The selloff shaved $200 billion off its market valuation immediately after the earnings release, primarily because the company guided for higher costs related to its AI investments.
The underlying sales and profit performance was actually quite decent, however, but profit estimates are likely to get correct to the downside. With that said, from a technical perspective, it may be too early to dip the toes in the water just yet.
Though I don't anticipate a major shakeout, I think that investors might want to sit tight and wait to see if a key level in the chart picture holds.
My Rating History
A strong advertising performance in the third and fourth quarter, as well as a big $50 billion buyback, underpinned my bullish stance on the social-media company in February.
Higher investments and a weak sales guidance, however, are poised to hurt Meta Platforms' cash flow and profitability trend in the near-term, which in turn suggests that profit estimates are set for downside corrections.
Robust Profit Beat
Advertisers felt very comfortable in the first quarter to spend money on Facebook and Instagram ads because it was primarily the company's marketing business that lifted the social-media company's total results for 1Q24.
Meta Platforms had quarterly profits, on an adjusted basis, of $4.71 which crushed the Street's estimate of $4.32 per share. It was also the fifth straight profit beat for Meta Platforms.
Earnings And Revenues (Yahoo Finance)
Digital Ad Strength Carries Over Into 2024
The first quarter was a make-or-break quarter from a momentum point of view, particularly as far as the advertising segment was concerned. Meta Platforms' first quarter sales came in at $36.5 billion, reflecting a very respectable 27% YoY growth rate as marketers continued to spend big dollars on Facebook and Instagram ads, primarily. In lockstep with higher sales, the social-media company's costs also went up, albeit at a much more moderate 6% YoY.
From a sales and operating margin angle, the first quarter was a very robust quarter for Meta Platforms, in particular because the company is carrying over digital ad strength from 2023 into 2024.
Furthermore, Meta Platforms' operating income trend continues to look very robust and solidifies the picture of sound advertising fundamentals: Meta Platforms produced an operating income margin of 38% in 1Q24, up 13 percentage point YoY. The average operating income margin in 2023 was 34% as marketers returned to the social-media platform, particularly in the latter half of the year.
Reality Labs, which reflects the company's hardware and software investments into the Metaverse, continued to lose a lot of money for the company: The segment lost $3.8 billion just in the first quarter.
Segment Results (Meta Platforms)
Technical Analysis
From a technical angle, the 11% drop on Thursday pushed the stock into a new short-term down-channel, which obviously is a threat. Both the 20-day and 50-day moving average lines just broke which, from a momentum perspective, could signal that Meta Platforms is headed for the 200-day moving average line which presently sits at $372.07. This is a very important key level because Meta Platforms could be at risk of drifting much lower should this important key level fail to hold.
In this case, I'd anticipated accelerating downside at least until $300 where Meta Platforms has built considerable support in the last year. At about $400, we get a full gap-close for the gap that opened up after Meta Platforms released fourth quarter earnings.
Moving Averages (Stockcharts.com)
Forecast For 2Q24
Meta Platforms anticipates to see $36.5-39 billion in sales for the second quarter, which fell about half a billion dollars short of the mid-point estimate of $38.24 billion. The outlook reflects 0-7% QoQ growth, but the company's comments about its scaling of its infrastructure investments, particularly with respect to AI, can be blamed for the steep decline in the company's stock price on Thursday.
Though the company's CEO has not been too specific about a general investment timeline with regard to its artificial intelligence roadmap, Meta Platforms anticipates to embark on a multi-year investment cycle before AI investments provide positive returns for investors.
Wait Until A Bottom Has Formed
Growth in Meta Platforms' marketing business in the latter half of 2023 has been the primary reason for the company's big upsurge in valuation. The guidance for 2Q24, however, is indicating that the marketing sector might be primed for a bit of a slowdown in the near-term which, as I discussed, inserted new uncertainty into the investment thesis for Meta Platforms.
I predict that Meta Platforms is primed to see profit estimate corrections in the near term, given its rather poor sales outlook. The market models $21.69 per share in profits for 2025, reflecting a 16% YoY profit growth rate, which is down from 26% growth in 2023.
The stock is presently valued at 19x leading (2025) earnings, compared to 22x before 1Q24 earnings were released. Meta Platforms does own a very lucrative advertising platform that marketers clearly see as relevant, but I think that the current uncertainty relating to the company's sales trajectory makes Meta Platforms only a 'Hold' right now.
Alphabet Inc. (GOOG) is selling at a 21x earnings multiple and has avoided an earnings-driven selloff. Google also beat estimates and declared its first dividend, resulting in a much more positive market reaction to the company's earnings. As I said before, Google is more diversified than Meta Platforms and not exclusively dependent on marketing revenues for profit generation.
Earnings Estimate (Yahoo Finance)
Why The Investment Thesis Might Not Pan Out For Investors
Meta Platforms has so far not succeeded developing meaningful, non-advertising related revenue streams, which makes the social-media company unfortunately very dependent on the state of the marketing industry.
The Reality Labs unit is also far from producing operating profits, which suggests that the next lever for a possible acceleration of operating profit growth will come from AI, but this theme is anticipated to take years to play out.
If Meta Platforms' AI investments don't provide positive returns for investors in a reasonable timeframe, investors might get reminded of the company's failed investments in the Metaverse and depart the stock.
My Conclusion
My recommendation after Meta Platforms' 1Q24 is to sit tight and hold back with any purchases until we see an indication of a bottom formation.
Meta Platforms has had a hell of a run in the last year and though the stock was not overbought ahead of the company's first quarter earnings, Meta Platforms' comments about the scaling of its AI investments as well as its soft sales guidance have weighed heavily on the company's valuation. I would wait until we have an indication that the crucial $372 price level holds, or that we see a bottom formation before this level gets tested.
Though Meta Platforms is now selling for 19x leading earnings, I think that it is too early to dip the toes in the water just yet. Meta Platforms is also at risk of seeing profit estimate corrections, which may further compress the stock multiple and lead to the creation of additional negative market sentiment towards the social-media company.
Sitting on the sidelines until a bottom has formed can't hurt investors, and I think that this is the best course of action after Meta Platforms' 1Q24.
