Meta's Stock Rebound of 54% Remains Unstable

Meta Platforms Inc.'s recent rally has failed to convince some skeptics, given how much money the company continues to pour into building its version of the metaverse.

Meta has been the best performer in the S&P 500 Index since the stock's recent low in November, gaining 54%. The bounce was partially driven by the social-media firm's announcement that it would slash more than 11,000 jobs, the first major round of layoffs in the company's history.

Despite the recent surge in Meta's stock price, there are still plenty of signs of skepticism among investors. The stock is currently selling for less than half its average price-earnings multiple of the past decade, and it is one of the cheapest stocks in the Nasdaq 100 Index. Meta's shares are still 64% below their 2021 record, and analysts on average expect the stock to gain only 7.7% over the next 12 months.

The problem for the bears is that Meta's expensive bet on the metaverse is unlikely to go away anytime soon, and it will account for a fifth of all costs this year. Additionally, its once-lucrative ad business is stagnating due to changes in Apple Inc.'s privacy policy, which makes it more difficult to target consumers with ads on its devices.

According to Louise Dudley, global equities portfolio manager at Federated Hermes, the metaverse will keep the company's expenses relatively high. She notes that there is a lot of execution risk at Meta, making it a less attractive investment compared to other mega-caps.

To keep the rally going, Meta may need to offer investors more clarity on its strategy for competing with social media rivals like Tiktok.

Investors will want to see how much of a squeeze Apple's privacy policy change is continuing to put on ad revenue. In February, Meta estimated that Apple's move would cause a $10 billion revenue hit for the year.

Some investors are hopeful that Mark Zuckerberg will scale back or abandon his plans for the metaverse, due to the impending economic slowdown. This could force him to cut back on spending and refocus his efforts.

"The pressure on revenue growth may cause some tech companies to stop behaving as though money is free and halt some less promising projects outside their core business," Terry Smith, manager of the $28 billion Fundsmith Equity Fund, wrote in a letter to investors this month. He specifically cited Meta's spending as an example.

"Without that spend, we would own a leading communications and digital advertising business with a single-figure price-earnings ratio," he wrote.

A key test will come on February 1st when Meta reports its fourth-quarter earnings. According to Bloomberg data, analysts have slashed their average expectations for adjusted earnings per share by 27% and for revenue by 15% over the last six months. This will be a key indicator of how the company is faring and whether or not it can meet investors' expectations.

Despite the bearish sentiment, there are still plenty of bulls. JPMorgan Chase & Co.’s Doug Anmuth upgraded his recommendation on Meta to overweight from neutral last month, noting cheap valuations. And among investors polled by JPMorgan this month, 41% said they expected Meta to be the top-performing megacap internet stock of 2023.

Sylvia Jablonski, chief investment officer of Defiance ETFs, said that it appears as though Meta has realized that it would be more strategic to shift its focus back to its advertising business rather than putting all of its eggs into the metaverse basket. Jablonski went on to say that this is "a welcome balance for investors."

Tesla Inc. shares are up 3%, on track to reverse monthly losses. If the rebound holds, the stock will snap a five-month streak of declines. The electric-car maker’s stock has been weighed down by the surge in interest rates that’s caused investors to flee highly valued investments. Additionally, weakening consumer demand and CEO Elon Musk’s preoccupation with his acquisition of Twitter have also contributed to the stock decline.