What’s Behind This Stock’s Explosive Rally?

Meta Platforms Explosive Rally After $251.3B Wipe-out

A year after suffering a $251.3 billion market value wipe-out, Meta Platforms has emerged as a Wall Street darling.  Investors who took advantage of the biggest wipe-out in history have been rewarded immensely, as the social networking giant has bounced back, more than quadrupling its market value.

Meta Platforms Bullish Thesis

While the stock is up by more than 160% for the year, investors and analysts are confident that there is still some room on the upside given the solid underlying nag fundamentals. Meta Platforms is benefiting from increased spending on advertisements on its flagship apps, Instagram and Facebook.

Likewise, a restructuring drive that commenced last year, resulting in the reduction of the workforce and a focus on areas with high growth, has strengthened its market sentiments. Consequently, the stock’s market sentiments have improved significantly, with the stock commanding 62 buy-equivalent ratings of the 70 analysts covering it. It’s the highest number since the firm went public in 2012.

The solid buy rating on Wall Street is backed by the investment thesis that Meta remains a preferred advertising platform for most advertisers. The company boasts of an unmatched scale relative to its competitors, owing to the millions of active users that flock to its Facebook and Instagram apps daily. Advertising sales have increased significantly a year after concerns they had contracted as advertisers pulled back amid inflationary pressures in the market.

CEO Mark Zuckerberg’s shelving of a multibillion-dollar plan to build a version of the metaverse has also boosted Meta Platform’s sentiments in the market. The increased focus on cost-cutting has toned down metaverse talk, and robust revenue growth affirms Meta Platform’s prospects and growth metrics.

Analysts are overly optimistic about the company’s long-term prospects, with estimates indicating the company is on course to generate $18 a share in earnings next year. It will be a significant improvement from the $10 a share generated last year. While the company’s valuation has increased significantly to about 18 times earnings over the next 12 months, Meta stock is still the cheapest stock among the seven biggest tech and internet stocks.

Meta Platforms Headwind

Nevertheless, the high earnings expectations are dependent on economic growth. The Federal Reserve has already hinted at the possibility of maintaining the high interest rates for longer in the race to push inflation below the 2% level.  The economy’s risk of plunging into recession is high, with economists projecting a mild recession amid the high-interest rate environment. A recession would hurt Meta Platform’s ability to attract revenues from its lucrative advertising business.

Competition is another headwind standing in the way of Meta Platform achieving its earning expectations. Needham & Co’s analyst Laura Martin has a sell rating on the stock, insisting that the company is a risk amid rising competition.  There is already talk that TikTok is eating into Facebook’s domain, having emerged as a favourite networking app for millions of people worldwide.

Changes to mobile operating systems like the one on Apple that hurt Meta Platform’s ability to target users with ads, is another headwind that could take a toll on the company’s prospects in the advertising business.

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