Meta Platforms (NASDAQ:META) shares may rocket higher, but a growing number of commentators and investors are growing concerned about META stock.
Namely, that after its incredible run since the start of the year, the social media giant’s super rally is at risk of reverse course. The market overreacted to moderately positive news, and set the stage for disappointment later this year.
However, it’s hard to see this being the most likely outcome for META in the near-term. In fact, there may be more to suggest that a continued recovery is possible.
Numerous factors, including the company’s artificial intelligence catalysts, may be sufficient for the stock to not only hold onto gains from the past six months, but add to them over the next six months. Here’s why.
Why Pessimism is on the Rise
In a brief span of time, Meta Platforms has gone from an out-of-favor stock back to an in-favor stock. With this, it’s not much of a surprise that many argue a correction is on the way.
Admittedly, the bear case these skeptics lay out is quite substantive. It comprises more than merely pointing out that META stock currently trades at a premium. The company has a high valuation for a mature, albeit growing, business, trading at 32.5 times trailing twelve month earnings.
Alongside this, they will point out that the company still faces many headwinds. Although Meta delivered a strong earnings beat this quarter, it still needs to get back to levels reported prior to the tech sector slowdown.
The European Union recently ordered META to pay a $1.3 billion fine because of violations of EU data privacy laws.
On top of pointing to META’s rich valuation, and current near-term issues, bearish investors are also making the argument that the tech giant’s status is overhyped.
Why I Beg to Differ
There may be multiple arguments backing the bear case for META stock, but for each one, I would beg to differ. First off, valuation. Shares may look pricey today, especially when compared to most of the other FAANG components.
However, keep in mind that the slump in digital advertising demand hurt META. Until the end of 2022, the company was over-staffed and had yet to implement several rounds of large layoffs.
Since then, the company has embarked on what may end up being an earnings comeback for Meta.
First, Mark Zuckerberg who took heed of cost-cutting recommendations presented to him by an activist investor last fall. These savings may didn’t grow earnings. They did, however, help META’s bottom line. The last report showed it was much higher than it was in each of the two preceding quarters.
After cost savings, the rebound in digital ad demand stands to further boost results from here. Finally, atop these two factors, yet another one could spark a material increase in profitability: the company’s big move into AI and machine learning.
This Tech Comeback May Have Legs
Yes, there are several large tech firms that appear set to dominate the artificial intelligence space. The jury’s still out whether the company will be one of them. However, that’s not to say that AI will be a negative rather than a positive for the stock going forward.
While it may cannot dominate the space, Meta could still use this technology to further strengthen its existing business.
As I argued earlier this month, the company is making progress developing advanced generative AI advertising tools. These could heighten the appeal of both its major platforms, paving the way for better-than-expected revenue and earnings growth.
In short, this tech comeback may have legs. Consider recent positive news with META stock as possibly just the start. With this, feel free to enter or add to a position at current prices.
META stock earns a B rating in Portfolio Grader.
— Louis Navellier and the Investor Place Research Staff
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Source: Investor Place