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Investors Business Daily

Is Meta Stock A Buy? Facebook Parent Breaks Out On AI Buzz, Earnings Optimism

Meta Platforms stock has broken above one entry point and is flirting with another amid analyst optimism over the coming Q3 earnings update and excitement over new technology unveiled by the parent of Facebook and Instagram, including smart glasses with a built-in AI assistant.

Is Meta Stock A Buy?

Meta stock has rallied 169% so far in 2023 through Thursday's close, second only to Nvidia in the S&P 500.

A few catalysts could continue to push Meta stock higher, if the uncertain stock market backdrop cooperates. Meta's Quest 3 virtual-reality headset, which  is 40% thinner than its predecessor, just went on sale on Tuesday. Meta's Ray-Ban smart glasses, updated with an AI assistant and built in partnership with EssilorLuxottica, will be available for $299 starting Oct. 17.

We could hear about how those launches are going when Meta announces Q3 earnings results after the close on Oct. 25.

The real excitement over Meta stock hasn't focused primarily on the newest flashy tech. Wall Street has mainly been fired up because the Menlo Park, Calif.-based social media giant has restored confidence in its digital advertising prowess and revenue growth appears to be back in high gear. Any sign of momentum for Meta's Reality Labs division focused on the metaverse, virtual reality and smart-glasses opportunity would be icing on the cake.

Meta stock is showing impressive resilience and relative strength, even as the broader stock market has struggled in the face of rising interest rates. Still, there's some risk that growth expectations have gotten carried away. Analysts could be getting too bullish about the extent to which Meta will be able to ramp up advertising on Reels short-form videos. A consumer spending slowdown and privacy regulation also could be near-term headwinds.

Meta Earnings And Outlook

On July 26, Meta reported Q2 earnings of $2.98 a share on sales of $32 billion in the June quarter, topping expectations. Meta earnings increased 21%, breaking a six-quarter streak of declines. Sales advanced 11%, a second straight quarter of growth.

For the third quarter, Meta predicted revenue of $32 billion to $34.5 billion, growing by a range of 15.5% to 24.5%. On Monday, Wells Fargo analyst Ken Gawrelski said he expects Meta Q3 revenue to come in near the high end of the guidance range and still manage to accelerate further in Q4.

However, Gawrelski also predicts Meta will raise projected operating expenses to a range of $95 billion to $100 billion, up from $89 billion to $91 billion in 2023. This year's spending includes about $4 billion in restructuring charges. Initial capital spending guidance for 2024 should rise to $34 billion to $39 billion, up from this year's $27 billion to $30 billion.

Amid the higher spending outlook, Wells Fargo trimmed its Meta stock price target to 372 from 389, keeping an overweight rating.

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Reels Monetization

Reels ads hit an annual run rate of over $10 billion in Q2, up from $1 billion a year earlier. The massive jump came as the number of short-form videos played across Facebook and Instagram reached 200 billion per day. That's up more than 40% from 140 billion last fall.

In a bid to compete against TikTok, Meta programmed its AI discovery engine to prioritize Reels videos in content recommended to users. So time spent watching Reels videos subtracts to an extent from other activity on Facebook and Instagram. Still, Meta says that part of Reels growth reflects "incremental engagement." That means that it is a net contributor to overall time spent on Meta's apps.

Meta also needed time to figure out how to optimize Reels ads following its 2020 launch. It had been running a lot of ad-free content. Now, the rising ad load on Reels has provided a one-time jump in ad sales.

But how much more can that ad load grow? Citi analyst Ronald Josey says his firm's tracking shows the ad load on Reels growing to 19% in Q3 from 17% in Q2. That means 19% of the content a user sees is now advertising.

In a Sept. 7 research note, Morgan Stanley analysts said they see a path for $25 billion in Reels revenue in 2024. They note that Reels now derives average revenue per user that is only 28% of what other Meta content brings in. But they see potential for that to rise to 44% next year.

The Morgan Stanley analysts, who have a 375 target on Meta stock, forecast 2024 EPS of $18.50 a share, well above the $16.80 average estimate.

Meta Regains Its Competitive Edge

A big part of Meta's turnaround story involves overcoming the industry upheaval caused by Apple's privacy change. Starting with the iOS 14.5 update in the spring of 2021, Apple began requiring apps downloaded through the App Store to let users opt in or out of tracking their activity across third-party sites. With the bulk of users opting out, Meta lost the data needed to help businesses narrowly target advertising to consumers likely to have an interest in their products or services.

In February 2022, Meta revealed just how big of a revenue hit Apple's privacy shift would deliver, $10 billion in 2022 alone, amounting to about $2.5 billion per quarter.

The good news is that Meta seems to have come a long way in rebuilding its advertising edge. It did it partly by substituting user data with AI machine learning and automation.

Insider Intelligence estimates that Meta properties account for 42% of total time spent on social media by U.S. adults, but the company soaks up an estimated 75% of social media ad dollars.

Meanwhile, an important part of the Meta growth story is the ongoing shift to digital advertising. Those ads grew 5.5% from a year earlier in Q2 vs. 2% for the ad market across all media, according to a July 13 Deutsche Bank note.

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Meta Headwinds?

CFO Susan Li noted that Meta's outlook for Q3 benefits from a comparatively weak third quarter in 2022, when revenue declined 4.5%. "We're really lapping a much-weaker demand period a year ago."

Li credited "improvement in the macroeconomic landscape" as a big factor in Q3 guidance. She highlighted "stabilization" in key advertiser segments like online commerce and gaming.

Since then, interest rates have surged, gas prices have climbed, and consumers have begun repaying federal student loans. Consumer spending on discretionary purchases will likely slow in the U.S. in Q4, while chances of recession are rising in Europe.

Regulation is the other main worry. The European Union hit Meta with a $1.3 billion fine in Q2 for violating its General Data Protection Regulation by transmitting data on EU citizens to the U.S.

To get in compliance, Meta will reportedly allow EU users to opt out of seeing advertisements — if they instead opt for paid versions of its apps. The Wall Street Journal reported that Instagram or Facebook for mobile phones could run $14 per month. It's not clear whether the plan will satisfy EU regulators or how it will go over with users.

Ray-Ban Smart Glasses

Meta's new smart glasses will be able to livestream video to Facebook or Instagram from the perspective of the wearer. The glasses will also come with an AI assistant that can answer questions on the fly. But that capability will become much more interesting next year when CEO Mark Zuckerberg said a free software update will enable the AI assistant to see what you're seeing.

"If you want to know what the building is that you're standing in front of, or if you want to translate a sign that's in front of you to know what it's saying, or if you need help fixing this sad leaky faucet, you can basically just talk to Meta AI and look at it and it'll walk you through it step by step."

"There are 1 billion or 2 billion people who have glasses today. I think in the future, they're all going to be smart glasses," essentially wearable computers, Zuckerberg predicted on the Q2 earnings call.

Still, Meta's Reality Labs division lost $3.7 billion in Q2. At the time, the company said it expects year-over-year losses to rise in 2023 and to grow "meaningfully" again in 2024.

Quest 3

Meta said its Quest 3 virtual-reality headset will have a base model with 128 gigabytes of storage that costs $500. A 512-GB model will be available for $650. CEO Mark Zuckerberg also announced that Microsoft'sMSFT Xbox Cloud Gaming service will available to Quest 3 users.

Beyond virtual reality, the Quest 3 also lets users "interact with virtual content and the physical world simultaneously," offering a "mixed reality" experience. That could mean playing a virtual game on your kitchen table or visualizing virtual art on your living room walls.

The Quest 3 will compete with Apple's Vision Pro, set for release in early 2024, though at a much lower price point. The Vision Pro is expected to retail for $3,499.

Generative AI Tools

Meta also announced 28 AI chatbots, which are similar to ChatGPT, but which have distinct personalities, including Snoop Dogg and Tom Brady. Zuckerberg showed off soon-to-be-available generative AI editing tools that can alter photos for sharing. In one example, AI turned an image of his dog into an origami look-alike version.

The hope is that such tools will increase engagement. Still, it remains to be seen whether there will be much of a payoff in revenue and profits from general-purpose chatbots that are free to use. Generative AI operating costs are much higher than regular search.

However, Zuckerberg is optimistic that generative AI can help unlock the potential to monetize business messaging, a key growth area for Meta. Click-to-message ads, which open up a WhatsApp or Messenger chat with businesses, have reached a $10-billion annual rate, Zuckerberg said on the Feb. 1 earnings call. In the latest call, he noted that the number of businesses using paid messaging products has doubled from a year ago.

One of the biggest issues limiting monetization of business messaging is that "it's quite human labor-intensive," Zuckerberg said. That's why Meta's click-to-message ads have only taken off where the cost of labor is relatively low. But in a world where every business has an AI agent, "the kind of success that we're seeing in Thailand or Vietnam with business messaging could kind of spread everywhere," he said.


After unveiling all this new technology at its Connect conference on Sept. 27, Meta still had one more potential ace up its sleeve. The next day, Zuckerberg began to win some believers in his vision for a metaverse future with the unveiling of lifelike avatars.

MIT research scientist Lex Fridman conversed with Zuckerberg as photorealistic avatars in an interview on his podcast, calling it "one of the most incredible experiences of my life."

"It feels like we're in the same room," Fridman said to Zuckerberg. "It feels like the future."

Zuckerberg said he expects to roll out the technology over the next few years. It won't be broadly accessible until the avatars can be produced with a two- or three-minute scan by your cell phone.

Meta Stock

In Thursday stock market action, Meta stock slipped 1.1% to 324.16. On Wednesday, Meta stock had advanced 1.9% to 327.82. That move carried Meta past a 326.20 buy point from an 11-week consolidation, according to a MarketSmith analysis.

While Meta stock slipped below that buy point on Thursday, one earlier entry point remains actionable.

On Oct. 6, Meta stock surged 3.5%, springing higher off its 50-day moving average and clearing a 312.87 buy point from a 5-weeks-tight pattern. That came after four straight weeks in which Meta stock has closed up or down less than 1%.

Meta's relative strength line continues to trend higher after recently eclipsing July's 52-week high. The RS line, the blue line in the chart above, tracks a stock's performance vs. the S&P 500 index.

The RS line had been rising before Meta stock's latest move higher because it had largely bucked the stock market's downdraft. Now it's still rising as the S&P 500 is attempting to rally

Be sure to read IBD's The Big Picture every day to stay in sync with the market direction and what it means for your trading decisions.

Meta stock is part of the IBD Leaderboard portfolio of elite stocks, which initiated a position in March as Meta broke out of a short, flat base with a 197.16 buy point. Meta also is part of the flagship IBD 50 list of leading growth stocks.

Bottom Line: If the stock market has found its footing, Meta looks poised to keep leading the way higher. Meta stock is currently a buy.

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