Our Analysis of Meta Platforms, Inc. (NYSE: META)

In July, we began sharing our “Quantamental” analysis of some of the most well-known and widely owned stocks.

This approach combines "quantitative" analysis, which consists mostly of technical analysis, with "fundamental" analysis of the company's operating metrics.

We have developed and refined this approach over our thirty years as professional investors.

We have simplified our approach to three simple analyses that we think can cover 90% of the analysis of any individual stock.

We will apply this analysis to some of the most popular stocks each week in HX Daily.

Most recently, we have been looking at more traditional companies like Berkshire Hathaway Inc. (NYSE: BRK/B) and Nike Inc. (NYSE: NKE).

When we began this series, however, we initially focused on the members of the “Magnificent Seven.” These are the largest technology stocks that have fueled much of the stock market rally over the past few years.

Today, we will apply our quantitative analysis to one of the members of the Magnificent 7 that we did not analyze previously - social media platform Meta Platforms, Inc. (NASDAQ: META) or as most of us know it - Facebook.

Our analysis below is not a formal recommendation on the stock. Based on our analysis, we are giving our views of what is most likely to happen from here.

Here is the analysis…

1. Technical Analysis

Over the past twelve years, Meta Platforms Inc. (formerly Facebook) stock has experienced significant growth and volatility.

Over the last ten years, it has gone from a low of roughly $55 per share to a recent high of almost $550 earlier this month. That is a ten-fold return in the stock!

After its 2012 IPO, the stock saw an initial dip but steadily climbed as the company expanded its advertising and social media dominance. META continued to grow driven by strong user growth and increased ad revenue.

It rallied swiftly during COVID as the entire world moved to interacting online but took a big turn downward starting mid-2021 dropping almost 75%.

The biggest reason for the decline was due to the billions of dollars META CEO, Mark Zuckerberg was pouring into the “metaverse.”

Investors grew concerned that rather than reinvesting money into revenue producing initiatives, Zuckerberg continued to focus on investing in the metaverse.

His aggressive spending was poorly timed as the post-COVID world re-opened, and they saw a deceleration in user metrics. This happened at the same time the new social media platform Tik Tok was also seeing exploding growth.

We will discuss this more below, but the combination of heavy spending and decelerating revenue growth was a bad combination for earnings and hit the stock.

After bottoming, though, in October of 2022 the stock has been a huge winner. It has gone up more than five-fold and hit a new all-time high on July 1^st of $539. The stock is close to breaking this new high, currently sitting at $533.

Here is the recent stock price and RSI chart…

The stock is currently trading at an RSI of about 40 or the middle ground of the overbought/oversold range.

From a technical perspective, the stock continues to be in a strong uptrend. It also is not overbought and trading in this new range near its all-time highs.

We think this could be a good entry point to buy the stock.

TECHNICAL ANALYSIS = BUY.

2. Earnings Revisions

Our readers know that we think the strongest driver of near-term stock price performance is whether companies beat numbers and see positive earnings revisions.

We refer to them as “earnings” revisions, but they can also be revenue revisions. We usually look at not only the most popular measure—earnings Per Share (EPS)—but also other measures, such as Earnings Before Interest, Depreciation, and Amortization (EBITDA).

For META, the EPS revisions are most important, and here is the chart of those estimates…

We mentioned the bottom in October 2022, and you can see it here in the earnings revisions.

Near the end of 2021, the company was expected to earn almost $22.00 per share for 2024 and those estimates fell more than 50% to about $10.00 a year later. This was that nasty combination we mentioned previously of heavy investment spending and slowing revenue growth.

The earnings estimates bottomed out in late 2022, though, and this has coincided with the recovery of the stock.

CEO Zuckerberg stepped back from some of the spending, and the company began to get better visibility on their revenue growth. This was partially the result of their “Reels” initiative which began to take on Tik Tok more aggressively.

The final catalyst for earnings was that it turns out that much of the metaverse spend was on technology directly related to artificial intelligence or “AI.” This has left the company well positioned to take advantage of this megatrend.

This momentum can be in seen their results versus analyst expectations on their quarterly earnings.

Here is that table…

Since Q1 2023, the company has been beating numbers nicely including this most recent quarter.

We have mentioned that the stock is up more than five-fold since bottoming in later 2022. This is DIRECTLY tied to the changes in earnings revisions.

We think that their operational momentum is likely to continue and power the stock forward. Based on this momentum, we think the stock is a buy.

EARNINGS REVISIONS = BUY

3. Earnings Growth

The final measure we focus on is the actual growth in earnings.

META has been a great stock through the years, so it is not surprising that they have also seen some great earnings growth – except for 2022. Here is that table…

The company has grown EPS an incredible 35-fold over the last eleven years.

Like many of its internet peers, it saw a big increase in EPS during 2021 and then saw a retrenchment.

After cost-cutting measures, META's EPS growth has rebounded strongly.

If the company meets analyst estimates, its EPS will more than double from 2022 through the end of next year.

We believe META's earnings growth is sustainable, particularly as they have yet to monetize WhatsApp, one of the world's largest social networks. Their significant investment in AI also positions them well for future success.

Additionally, their current phase of heavy spending on AI is expected to decrease over time. If META can maintain or even build momentum in their core business and start to better monetize WhatsApp and Reels, revenue growth should remain robust.

Combined with a potential slowdown in spending, we anticipate continued strong momentum in EPS growth for META.

META has refocused on growing its revenue through advertising, its core revenue producer.

We believe that analysts continue to underestimate META's earnings growth upside, which could be a positive catalyst for the stock moving forward.

EARNINGS GROWTH – BUY

Conclusion

Since launching our Quantamental analysis series back in July, we have now analyzed six of the “Magnificent Seven” stocks.

Our initial view on TSLA and NVDA was cautious, and this has paid off as both stocks are down since we published our analysis. Our views were more optimistic than the other ones we examined – GOOG, AMZN and MSFT – and continue to remain constructive.

This is now also the case with META. We think that most of the “Magnificent Seven” are lined up to produce some good returns in the coming six to twelve months.

They have not done much as a group of stocks for the last six months but have continued to hit numbers and grow at a rate far above the S&P 500.

While we don’t necessarily think they will lead the stock market like they did in the first half, we do think there is good upside ahead.