How Meta went from dog to investor darling

A leaner Meta Platforms is impressing investors, with analysts turning more bullish as cost cuts coupled with stabilising advertising trends make the Facebook owner’s stock look more durable in a looming economic slowdown.

The shares have surged 140% from a seven-year low in November as Meta started cutting thousands of jobs in light of falling sales. The company announced further layoffs last month and pledged to be more efficient, adding kindling to the rally.

More than two dozen brokerages have increased their price targets on the stock since the second round of job cuts was announced. Analysts also have pushed up Meta’s 2023 earnings per share estimate by 15% over the past three months. Morgan Stanley’s Brian Nowak in March restored his buy-equivalent rating after sitting on the sidelines for less than five months.

While the ad business has slowed, it’s at least stabilised, bulls say. And in another positive sign for earnings, changes in Apple’s privacy policy that make it harder to target iPhone users with ads have now been in place long enough that they’re no longer affecting Meta’s year-over-year growth rate.

“The catalyst for Meta’s recent rally is likely traced to both extensive cost-cutting measures and adjusting to the negative effects of Apple’s privacy changes, which significantly hurt ad revenue,” said Mike Akins, founding partner at ETF Action, the index provider of Amplify’s MVPS ETF. “To a large extent, Meta’s recent surge is simply recovering from being oversold.”

Because analyst earnings estimates are rising along with the stock price, Meta’s shares are still much cheaper than its big tech peers and the Nasdaq 100 Index. Trading at 17 times forward earnings, Meta is below its historical 10-year average of 26x. In contrast, Amazon.com trades at 36x, Microsoft’s price-earnings ratio is 28, Apple is at 26 and the tech-heavy gauge sells for 24x.

Durable megacap

Morgan Stanley’s Nowak called Meta the most durable megacap if consumer spending weakens, since the company’s cost reductions have been bolder than at peers such as Alphabet.

Concern about inflation and a potential recession have squeezed ad budgets at businesses, crimping the primary revenue stream for companies like Meta, Google parent Alphabet and Snap. But some analysts, such as Guggenheim’s Michael Morris, are also seeing more stability in overall advertising demand.

Still, some investors may be unwilling to pay up now for Meta after the blistering rally since November, especially because there may well be a recession in the offing. Even if Meta’s ad business holds up better than rivals’, if the downturn is steep enough all media stocks will suffer.

Until the beginning of last year, Meta averaged revenue growth of 42% over the decade since 2012. The company shocked investors by reporting its first ever sales decline last year. Now with trends stabilising, its sales are set rise by 4.7% this year, with growth more than doubling to about 11% in 2024.

While that’s a much slower cadence than investors are used to, Meta under CEO Mark Zuckerberg has managed to resume growing.

“In many respects. what Mark Zuckerberg has done in the last couple of months is begin to look at running the company like a regular company as opposed to a tech company with top-line growth that can cover a lot of mistakes, because they really didn’t have that anymore,” said Mark Stoeckle, CEO of Adams Funds, which owns the stock.  — Subrat Patnaik, with Tom Contiliano, (c) 2023 Bloomberg LP

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