Strength in Meta Platforms May Not Last

Meta Platforms (META) is up 54% since tumbling to a 7-year low in November and has been the best performer in the S&P 500 ($SPX) (SPY) since then.  The stock has moved steadily higher since early November after announcing it would cut its workforce by more than 11,000 jobs, the first major round of layoffs in the company’s history.  However, many analysts are concerned the current rally in Meta Platforms may not be sustainable as the company continues pouring money into building its version of the metaverse.

Uncertainty remains high about the future earnings prospects of Meta Platforms.  The stock sells for less than half its average price-earnings multiple of the past ten years and is one of the cheapest stocks in the Nasdaq 100 Index ($IUXX) (QQQ).  Also, the share price of Meta Platforms is 64% below its 2021 record high, and analysts, on average, expect the stock to gain only 7.7% over the next 12 months.

Analysts remained concerned about the amount of money Meta Platforms continues to pour into the metaverse, an immersive virtual world that will account for 20% of all the company’s costs this year.  Federated Hermes said the metaverse will keep the company’s expenses “relatively high, making it less of a bull case compared to other mega-cap technology stocks.” 

Meta’s ad business is stagnating because of changes to Apple’s (AAPL) privacy policy that makes it more difficult to target consumers with ads on Apple devices.  Last February, Meta estimated that Apple’s privacy move would cause a $10 billion hit to revenue in 2022.  The markets will look to February 1 when Meta reports Q4 earnings results. According to Bloomberg data, analysts have cut their average expectations for adjusted earnings per share for Meta Platforms by 27% and for revenue by 15% over the past six months.

Despite concerns about ad revenue for Meta Platforms, some analysts remain bullish on the company’s earnings prospects.  JPMorgan Chase last month upgraded Meta to overweight from neutral, citing cheap valuations.  Also, a JPMorgan survey earlier this month showed that 41% of respondents said Meta Platforms is expected to be the top-performing mega-cap internet stock this year. 

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