Meta platform back on track with spending focused where investors want

By Subrat Patnaik

Meta Platforms Inc. finally seems to be spending its time and money on things that investors like.

 

After an unpopular pivot to Chief Executive Officer Mark Zuckerberg’s metaverse virtual-reality vision in 2021 and last year’s record stock plummet, the firm is seen to be back on track. It has released a desktop version of its Twitter equivalent, Threads — key to it rivaling what’s now known as X. Meta shares are also regarded as an artificial intelligence play.

“The rally this year has been partly fueled by cost cuts – hiring freezes, job reductions – and a reduction in the capex budget,” said Russ Mould, investment director at AJ Bell. He notes “a tighter focus on where the money goes, so that increased ad revenues provides a faster and more predictable return.” 

While shares are up 141% this year — the biggest gain among the former FAANG group of companies comprised of Facebook parent Meta, Amazon.com Inc., Apple Inc., Netflix Inc. and Google parent Alphabet — the tech rally has cooled this month. The stock, which was edging lower on Tuesday, has underperformed its peers and the tech-heavy Nasdaq 100. 

Still, most of the year-to-date gains have come as investors cheered the company’s cost-cutting measures, and were positive about improving advertising sales in the latest results. The shares have the highest number of buy ratings among analysts in at least two years, according to those tracked by Bloomberg. 

“We were wrong on Meta,” said Wells Fargo Securities LLC analyst Ken Gawrelski, who recently upgraded his rating to overweight from equalweight. “We see Meta as an accelerating growth story with emerging upside AI options in messaging, ad tools and new consumer applications.”

The firm remains the second-biggest spender on Wall Street, trailing only Amazon.com, according to data compiled by Bloomberg. The Reality Labs division in charge of realizing Zuckerberg’s metaverse vision is expected to have “meaningfully” greater losses this year than it did last year, the company has said. The company has also been investing in Reels, the short-form videos on Instagram and Facebook that were made to rival TikTok.

While the metaverse narrative has been toned down, Meta has forecast spending of as much as $30 billion this year and more in 2024, and specifically highlighted its investments in support of AI initiatives.

But those AI plans are expected to underpin strong revenue growth, according to Eric Clark, a portfolio manager at Accuvest Global Advisors. Clark manages the Rational Dynamic Brands Fund, which owns Meta stock. 

“I’m fine with the spending, so long as it’s not on silly things like metaverse,” Clark said. 

With most Nasdaq 100 firms having reported quarterly earnings updates, analysts look bullish on the tech-heavy gauge. JD.com Inc., which is down 40% in 2023, is leading the group with analysts on average expecting the Chinese e-commerce company to rally 66% over the next 12 months. But the optimism isn’t limited to underperformers — Nvidia Corp. has surged 220% this year and analysts continue to see the stock rally by another 36% over the coming year. As of Monday’s close, only three index components have a negative return potential.