One of the last Wall Street analysts with a bearish take on Meta Platforms stock has upgraded their outlook. But there are some concerns keeping them "on the sidelines."
Needham analyst Laura Martin on Thursday upgraded her call on the Facebook parent company to hold from a underperform.
"We upgrade Meta … based on: a) channel checks driving upside to our estimates; and b) Meta's strong labor productivity metrics driven by its economic model, which is globally scaled, doesn't pay for content, is software only, 'free-rides' on mobile devices, and has closed loop attribution for advertisers," Martin wrote.
Needham's previous underperform rating — the firm downgraded Meta in 2022 — was based on concerns about Meta's big spending on the metaverse as well as generative AI, Martin added. Both of those concerns "came true," Martin wrote, but were offset by strong revenue growth and job cuts that aided Meta's labor productivity metrics.
A bounce-back for Meta's advertising business and excitement about AI in 2023 helped the stock come roaring back to a trillion-dollar market cap after a deep slump in 2022.
Still, the neutral hold call from Needham reflects some ongoing concerns. Meta's labor productivity is slowing as its headcount and related costs rise, Martin wrote in the report.
Meanwhile, Needham expects Meta's capital expenditures will rise 84% in 2025 to $68 billion. That's the fastest growth among hyperscalers, Martin noted. The term refers to large cloud data center operators such as Amazon, Microsoft and Google-parent Alphabet.
The return on those capital expenditures is uncertain, Martin said, with the risk growing as the total spending increases.
"Why buy Meta now, when Meta admits they are in front of a 2-3 year investment cycle with unknowable ROICs?" Martin wrote, referring to return on invested capital.
Meta Stock Today
Out of 73 analyst ratings tracked by FactSet, Martin was one of just two analysts with sell or equivalent calls, prior to Tuesday's upgrade. About 86% of analysts have a buy or similar call for Meta, with 12% neutral.
In March 2023, Meta had 71% buy calls, 20% neutral and 9% sell calls, per FactSet.
On the stock market today, Meta stock is up a fraction at 716.35 in recent action. Major U.S. stock indexes were higher following a stronger-than-expected jobs report.
Meta closed at a record 738.09 on Monday, its first since Feb. 14. The stock pulled back Tuesday and Wednesday however and appears to close lower overall for a shortened trading week with the July 4 holiday. Shares could soon test Meta's 21-day moving average following a rally in late June.
Overall, Meta stock is ahead 24% year to date, the best performance among Magnificent Seven stocks.
Meta stock has also surged beyond a 5% buy zone above a 662.67 cup-with-handle buy point from a June 2 breakout, according to IBD MarketSurge.
