Meta Has Regained its Mojo & the Stock Has a Great Run, But it May Be Overpriced

Poor 2022

The social media giant had a very bad 2022, in a overall challenging year for the tech sector, amidst an aggressive monetary tightening cycle by the US Fed and other major central banks around the world. Advertising, which is its main source of revenues, faced headwinds from high inflation, recession fears and the lasting impact of Apple's App Tracking Transparency (ATT) policy.

What's more, the pursuit of the Metaverse drained resources with little to show for, which markets did not like and the firm paid the price. META.us collapsed last year, hitting the lowest levels since 2015 in November.

From Zero to Hero

Things begun to change after that though and Meta Platforms went "from zero to hero", as July was the ninth straight profitable month, marking its best run since the 2012 IPO (then named Facebook).

During the first seven months of 2023, META.us has risen by nearly 165%. This eye-watering performance trumps the broader tech rally. The tech-heavy NAS100 grew by around 44% in the same period, while the FAANG group gained around 64% (Meta, Apple, Amazon, Netflix, Alphabet).

A new group has been coined in the media this year, the Magnificent Seven (Meta, Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla), but Meta's meteoric rise has outperformed most of those companies too. It comes second only to chip-maker Nvidia, which rides the AI wave and its stock (NVDA.us) has more than quadrupled this year.

Business Turnaround

The stock outperformance is partly a result of improved external conditions and the broader tech rebound. Most importantly, it's a reaction to series of initiatives undertaken by CEO Mark Zuckerberg, in an effort to turn things around. He listened to investors who called for a downscale of the Metaverse, lower headcount and cost cuts.

He dubbed 2023 "The Year of Efficiency" which was music to the ears of markets and vowed to make the firm more nimble ^[1]. He slashed around 21,000 from late last year in an effort to rationalize the workforce after the pandemic boom. ^[2], ^[3]

More to it, he shifted immediate focus away from the obscure Metaverse and into generative Artificial Intelligence (AI) to improve the current products and services. Mr Zuckergeberg also launched a new text-sharing application named Threads, to rival Twitter (now X) which is having a turbulent ride since Elon Musk took over.

Impressive Q2 Results

Meta Platforms posted impressive results for the second quarter this month, which showed the Mr Zukerberg's initiatives are working. It retuned to double-digit revenue growth as advertising headwinds subside, margins widened, capital expenditures dropped and the 2023 estimate was lowered again, while the user base expanded further. Reality Labs which is responsible for delivering the Metaverse continued to lose money, but that is now less concerning, due the increasing revenue and the broader rationalization of costs.

Stock Headwinds?

Markets reacted positively to last week's Q2 results and the META.us moved closer to the 2021 all-time high (384.49). On the other hand, the Metaverse still burns a hole in the balance sheet, there is catching up to do on the AI front, Threads is far from taking out rival Twitter and even though the advertising environment is improving, there are still pitfalls.

Given this year's massive rally, some now consider the stock overpriced. The daily chart shows that the Relative Strength Index (RSI) has not followed the stock price higher over the last couple of months. This divergence could lead to a pullback towards the EMA200, but that road contains multiple roadblocks and daily closes below it would be needed for the upside momentum to pause.

Bulls are in control and the continuation of the rally will mostly depend on the progress of the changes that Mr Zuckerberg has been implementing. It is clear that Meta has regained its mojo and markets are attracted to it again, but will need to keep delivering. If it can do that, then the stock has more room to run, even if a correction may come.