Our Analysis of Meta (NASDAQ: META)

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In July 2024, we began sharing our “Quantamental” analysis of some of the most well-known and widely owned stocks.

This approach combines "quantitative" analysis, consisting mainly of technical analysis, with "fundamental" analysis of the company's operating metrics.

We have developed and refined this approach over 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.

When we began this series, however, we initially focused on the members of the “Magnificent Seven." These largest technology stocks 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 - social media platform Meta Platforms, Inc. (NASDAQ: META) or, as most of us know it - Facebook.

It has been in the news recently as it has traded higher for an incredible 14 consecutive days. This is a new record for the stock and extremely rare for ANY stock out there.

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

Here is the analysis…

1) TECHNICAL ANALYSIS

Over the past twelve years, Meta Platforms Inc. (formerly Facebook) 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 $725 at the end of last week. That is a twelve-fold return on the stock!

Note that when we wrote our original analysis in September, the stock was at a high of $550, so it is +30% in just the last few months.

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-19 as the world shifted to interacting online but took a significant downward turn starting mid-2021, dropping almost 75%.

The biggest reason for the decline was the billions of dollars META CEO Mark Zuckerberg was pouring into the "metaverse.”

Investors grew concerned that instead of reinvesting money into revenue-producing initiatives, Zuckerberg focused 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 when the new social media platform TikTok was experiencing explosive 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.

Here is the recent stock price and RSI chart…

With this record streak of consecutive days trading higher, the stock is at a high RSI of over 79. Again, this is rare for any stock.

Historically, buying stocks with an "overbought" RSI around these levels has not been a good bet in the near term.

Here is a table showing how META stock has done in the last decade when it has traded to similar levels…

In the very short term, buying the stock right now has not been a good bet. It has gone down more than it has gone up, and the average return is roughly breakeven. On this basis, we would not be aggressive about buying the stock right now.

Looking beyond 30 days, though, an overbought RSI is a strong BUY signal for META stock.

From a technical perspective, the stock continues to be in a strong uptrend. We would hold off on buying the stock now but would watch it closely.

TECHNICAL ANALYSIS = AVOID.

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).

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

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

Near the end of 2021, the company was expected to earn over $20 per share for 2024, and those estimates fell more than 50% to about $12 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 its revenue growth. This was partially the result of their "Reels" initiative, which began to take on TikTok 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 left the company well-positioned to take advantage of this megatrend.

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

Here is that table…

Since Q1 2023, the company has been beating numbers nicely, including this most recent quarter. In fact, the degree to which they are beating numbers has been INCREASING. This has helped the stock go parabolic.

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

We think their operational momentum will likely continue and power the stock forward. Based on this momentum, we believe 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 an outstanding stock through the years, so, unsurprisingly, they have also seen some remarkable earnings growth – except for 2022. Here is that table…

Here is the same table from when we first published our analysis in September 2024…

Look closely at the table; in just three short months, the 2024 EPS result moved from an estimate of $21.31 to an actual result of $23.96 or +12%. This is another reason the stock has done so well.

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

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

When we first analyzed the stock of META in September 2024, we noted the incredible earnings momentum at the company.

This momentum has not only continued but accelerated. The company is posting even better results.

This has been reflected in the share price, though, and the stock is overbought right now.

Currently, META might be in the best position of all of the "Magnificent Seven" stocks, and we think it is worth watching.

For now, however, we would AVOID the shares.