Meta’s Bargain Valuation Makes for Rare Safety Net

Investors have rewarded Meta Platforms Inc. for its financial discipline this year, as it clamped down on costs. Even so, the social media giant goes into its second-quarter earnings report with a relatively inexpensive valuation that provides a cushion against any minor misses.

(Bloomberg) — Investors have rewarded Meta Platforms Inc. for its financial discipline this year, as it clamped down on costs. Even so, the social media giant goes into its second-quarter earnings report with a relatively inexpensive valuation that provides a cushion against any minor misses.

While Meta shares have more than tripled from a seven-year low in November, the stock has yet to fully recover from the rout triggered by a historic, earnings-induced selloff that wiped out $251 billion in market value in a single session in February last year.

Options data point to a roughly 9.3% swing in either direction after Wednesday’s earnings update, in line with its average move over the last decade. However, Evercore ISI analyst Mark Mahaney said the price tag on Meta’s stock gives it “a lot of downside protection.”

Meta trades at about 20 times projected earnings, lower than its mega-cap technology peers and its own historic average, according to data compiled by Bloomberg. The stock is also much cheaper than the tech-heavy Nasdaq 100 Index, which trades at 26 times. And a 6.8% pullback over the last four trading sessions has also helped ease pressure on the Mark Zuckerberg-led company.

That’s not to say Mahaney rules out the risk of a stock correction. He notes that while Meta’s fundamental trends are materially improving heading into the second half of the year, there could still be a sharp reaction if it disappoints on key figures or surprises the market by amping up costs and Metaverse investments.

A spending splurge would be an about-face for the Menlo Park, California-based company, which has pledged to become a more efficient operation. That’s been accompanied by a push to improve advertising and the addition of generative artificial intelligence layers into its products. Analysts on average expect revenue, which fell for the first time in 2022, to accelerate in every quarter this year, according to estimates tracked by Bloomberg.

Ad Sales

Results Tuesday from Alphabet Inc. bode well for Meta, which derives nearly all its revenue from advertising sales. The Google parent reported second-quarter revenue that exceeded analysts’ expectations, boosted by ads on the company’s flagship search business.

A rebound in demand is key for Meta’s ad business, which has confronted high inflation and increasing competition. Worries about a potential recession have squeezed budgets at small businesses that have in turn had to curtail their online ad spend.

Meanwhile, Meta has been tackling peers head-on by emulating some of their most successful offerings. For instance, Reels, the short-video format that bears a striking resemblance to TikTok. And earlier this month it launched its challenger to Twitter — or X — called Threads. Evercore’s Mahaney has estimated that Threads could generate about $8 billion in annual revenue over next two years and reach close to 200 million daily active users.

Artificial intelligence is another area where analysts see promise. New Street Research upgraded the Facebook parent’s stock to buy from neutral on Tuesday citing positive feedback on the company’s AI efforts.

“Meta management has dismantled every bear case that builds investor skepticism around the stock,” said Tejas Dessai, an analyst at Global X ETFs.

“In terms of catalyst, the digital ads space is on a clear recovery from the slump of the past 12 months and Meta continues to win share,” said Dessai. The stock is the largest holding in the Global X Social Media ETF and easily the fund’s top performing component this year.

Tech Chart of the Day

The AI-driven frenzy has propelled Nvidia Corp. more than 200% higher this year. The stock, which had taken more than 18 years to reach $100 billion in 2017, has zoomed past multiples of that milestone in recent years within a matter of weeks. Four of the last five $100 billion market value additions have taken less than a month, according to data compiled by Bloomberg. Shares of the chip company were trading lower on Wednesday.