Meta’s $360 Billion Rally to Collide With Lofty AI Expectations

(Bloomberg) -- When it comes to social-media stocks, there’s Meta Platforms Inc., and then there’s everyone else.

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The Facebook parent has been the best-performer in the sector this year by far amid a surge in profitability. Delivering better revenue growth, it’s also cheaper than smaller peers like Snap Inc. and Pinterest Inc.

But to keep a rally that’s added more than $360 billion in market value going, Meta must show it can maintain such growth when it reports earnings on Wednesday. Of particular interest to investors: seeing a return on investment from hefty spending on artificial intelligence.

“The case is still there with some of the initiatives around AI and everything they’re doing to continue to improve targeting and engagement,” Hanna Howard, portfolio manager at Gabelli Funds, said. “There’s still room for growth on the top line and to continue to improve in margins. And, where it’s trading right now, at these levels it does still look attractive.”

Shares fell as much as 2.3% on Wednesday.

In February, Meta reported massive growth in both earnings and revenue in the fourth quarter, which also illustrated the impact of cost-cutting measures that included thousands of job cuts. It also announced a $50 billion buyback program and implemented a dividend. In contrast, both Snap and Pinterest delivered disappointing growth.

That has set up high expectations that may be difficult to overcome. This time around, Meta’s profit is expected to nearly double in the first quarter, while revenue is seen growing by 26%. Still, both are expected to wane later in the year, according to data compiled by Bloomberg.

Investors will be looking for updates on AI, which Meta has been using to improve ad targeting. The company recently debuted a new version of its AI model, which will run its in-app AI assistant.

“Meta has really evolved from a social play to more of an AI one, and it has a lot of tailwinds from that,” said Jay Woods, chief global strategist at Freedom Capital Markets. “Plus, while there were some growing pains with its year of efficiency, it is a lot more efficient now.”

With the stock clearly outperforming Snap, Pinterest and Reddit this year, Meta continues to look like the bargain of the group. The stock trades at 23 times estimated earnings, a discount to both its 10-year average and the overall Nasdaq 100 Index, as well as being cheaper than social peers.

Read more: Zuckerberg Avoids Personal Liability in Meta Addiction Suits

While Meta faces scrutiny around parameters for teens and children on its social media sites, it could benefit from some pending social media limitations. The US government is aiming to shut down TikTok, one of Meta’s biggest rivals, with a divest-or-ban bill that is headed to the Senate. Meanwhile, the number of daily users on X is reportedly falling, while Fidelity has cut the value of its position in the company formerly known as Twitter.

“Meta’s market-share trends look good, AI trends look good, while peers continue to be very hit or miss. And when they do miss, the market has been unforgiving,” said David Katz, chief investment officer at Matrix Asset Advisors. “We have a lot less conviction in the smaller social players, which seem to be struggling.”

Tech Chart of the Day

Tesla Inc. shares rebounded after Elon Musk vowed to launch less-expensive vehicles as soon as late this year, easing concerns about disappointing earnings results and diminished growth prospects. The stock gained 12%, putting it on track for its biggest one-day percentage gain since January 2022.

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• Shares of Tencent Holdings Ltd. have surged more than 10% this month, outperforming the Magnificent Seven and underscoring global investors’ growing appetite for China’s undervalued megacaps.

Earnings Due Wednesday

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--With assistance from Subrat Patnaik.

(Updates stock moves.)

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