Meta Needs a New Catalyst After Stock’s 77% Rally

After this year’s 75% rally in Meta Platforms Inc., analysts say the next catalyst may be some way off.

(Bloomberg) — After this year’s 75% rally in Meta Platforms Inc., analysts say the next catalyst may be some way off.

Big gains in the stock have been fueled by the company’s pledge to become a more efficient operation involving thousands of job cuts. Yet, cost-saving measures are likely mostly done for now, while Wednesday’s results are unlikely to show many signs of a sustainable rebound in digital advertising spending.

For the first quarter, revenue is expected to decline 0.9%, according to estimates compiled by Bloomberg. That will likely be followed by only a slow recovery, with single-digit growth being anticipated through year-end, paling alongside the company’s average growth of 42% over the decade since 2012.

Angelo Zino, senior equity analyst at CFRA Research, said he isn’t expecting a recovery in digital ads in 2023, while noting that most of Meta’s cost reductions “have largely been accounted for.” Still, reduced expectations “look attainable as long as advertising spend doesn’t fall off a cliff,” he said.

Meta’s advertising sales, which make up nearly all its revenue, have come under pressure after Apple Inc. tweaked its privacy policy to make it hard for social media platforms to target iPhone users. To further exacerbate the situation, concerns about high inflation, growing competition and a potential recession have squeezed ad budgets at many businesses.

The first indication of the ad industry’s health will be on display when Google owner Alphabet Inc. reports first-quarter results after markets close Tuesday. Snap Inc. is slated to deliver earnings on Thursday.

Even long-term Meta bulls like RBC Capital Markets’ Brad Erickson are cautious going into the results. The broker’s checks showed some unexpected deterioration in Meta’s return on ad spend after the firm made some changes to its platform in the second half of March, he said.

To be sure, even after this year’s rally, the stock hardly looks expensive. Trading at 16 times projected earnings, the Instagram parent is not only cheaper than tech megacaps like Apple Inc., Microsoft Corp., Alphabet and Inc., it’s also at a lower multiple than the S&P 500 and Nasdaq 100 indexes. And it’s a far-cry from its 10-year average of 26 times, according to data compiled by Bloomberg.

Bulls like Thomas Martin, senior portfolio manager at Globalt Investments, are optimistic that the digital ad market will rebound and help power more gains for the stock. 

“The revenue growth rate does have a chance to re-accelerate from here,” said Martin, who owns the stock in all his strategies. “Where it goes from there is another question, but re-acceleration is a good sign.”

Tech Chart of the Day

With the biggest technology companies due to report earnings in coming days, options imply that the stocks will swing at least 4% in either direction after results — putting hundreds of billions of market capitalization at stake. Meta, which has seen its stock move an average of 7.9% after its past earnings updates, is expected to swing 10.2%, according to data compiled by Bloomberg. Microsoft and Alphabet are slated to kick off the big tech earnings season when they report after the market closes Tuesday.

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