Meta: Another Earnings Beat Can Rapidly Change The Sentiment

Summary:

• Among the big tech companies, Meta stock has significantly outperformed since the last earnings due to a better monetization path for its AI investment.
• This outperformance of META stock can continue in this earnings season and the next few quarters because of the rapid returns within its AI services for advertisers.
• Meta is well positioned to beat Apple in the AR/VR space due to higher spending ability and clear focus.
• The long-term ability of the company to build a strong product, platform, and services lineup should be a good tailwind for the stock.
• Despite the recent bull run, Meta’s stock is trading at a modest 20x its EPS estimate for the fiscal year ending 2026, which is lower than Apple, Microsoft, and other peers, making it a good option for a long-term buy-and-hold strategy.

Meta (NASDAQ:META) stock has performed well in the last few quarters as the AI race heats up. All the big tech companies are massively ramping up their CapEx in AI chips to build new services. However, Wall Street is now focusing more on actual performance instead of possible growth a few years down the line. This has been clearly evident after the second quarter earnings season. Most of the big tech companies, including Microsoft (MSFT), Alphabet (GOOG), and Apple (AAPL) have lagged S&P 500 since the last earnings. Meta stock has been the only outperformer in this group since the last earnings season, showing 20% growth compared to 6% S&P 500 growth. In the previous article, it was forecasted that Meta could outperform other AI peers due to monetization improvements.

We could see this trend continue in this earnings season and in the near term due to rapid returns of AI investments made by Meta. Most of the other big tech companies are promising good AI growth in the future as they launch their AI services. However, Meta is already showing a big upward trajectory in the advertising business due to better targeting with new AI tools for advertisers. As an example, in Q2 2024, Meta reported 22% advertising growth compared to only 11% growth reported by Google’s ad business.

Besides the AI investment, Meta’s investment in Reality Labs is finally showing signs of success. Meta’s Quest 3S comes at a reasonable price, which gives it a big advantage over Apple. Within the AR/VR race, it is highly likely that Meta will be able to gain a massive market share, which should allow the company to build a strong product, platform, and services ecosystem. This should improve the monetization capability of the company. The EPS estimate for the fiscal year ending 2026 for Meta is $28.24 which gives the stock a forward PE ratio of 20 for fiscal year 2026. This is 30% lower than Apple’s forward PE of 28 for fiscal year 2026, making Meta stock a good bet within the big tech peers.

Another Earnings Beat Possible

Meta has performed remarkably well since the last earnings results, leaving behind most of its competitors. Most of the credit for this trend needs to be given to the rapid deployment of AI tools by Meta. This has allowed better targeting for advertisers and allowed the company to charge a higher price per ad. It also seems that Wall Street is now focusing more on reported numbers instead of possible AI growth runway many years ahead. All other big tech companies have ramped up their CapEx for AI chips, but they have not delivered any big upward trajectory in their core business. This is the main reason why their stocks are getting beaten down.

There have been an overwhelming number of upward EPS revisions for Meta stock in the last 90 days. The current EPS normalized estimate for the upcoming quarter is $5.29. It is likely that Meta could again beat the EPS and revenue estimate in this earnings season as new AI tools are rapidly launched for its core services. This should allow Meta stock to continue its outperformance relative to the broader S&P 500 and also its peer group.

The forward EPS growth estimate for Meta is quite strong. This moderates the forward PE ratio of the stock. Currently, Meta stock is trading at only 20 times the EPS estimate for fiscal period ending Dec 2026. This is quite modest when we look at the double-digit EPS growth projection for the company.

Reality Labs Can Finally Improve The Sentiment

One of the biggest headwinds for Meta’s EPS has been the massive losses in the Reality Labs. This segment has reduced Meta’s EPS by more than 20%. The annual losses in Reality Labs were close to $15 billion, and the company has lost over $50 billion since it started reporting the numbers in Q4 2020.

The recent Meta Connect event showed promising products and services from Meta’s VR effort. One of the main attractions was Quest 3S, with a price of only $299 and having most of the features of its more advanced alternative. This is less than 10% of the price of Apple’s Vision Pro. In March 2024, I forecasted that Apple’s Vision Pro was likely to see a very modest response. This has proven right, as the sticker shock kept many customers away from the product. Even a cheaper Vision Pro might not be able to compete with Meta’s rock-bottom pricing.

Meta has gone all-in for its VR initiative and the management sees this product as the next growth segment for the company. Currently, Meta suffers from a major challenge in the advertising space, as it does not control the product and platform. Apple has put a lot of barriers for Meta and there is a long history of rivalry between these two giants. A strong VR product line should give Meta complete control over the product, platform, and service. It could also allow the company to gain monetization options similar to Apple’s licensing rights and commissions on the App Store.

However, in order to build this ecosystem, Meta would need to significantly ramp up the product sales. The company could easily absorb $500 or more loss per unit while it increases the cumulative shipment to 100 million level. Meta’s partnership with Ray-Ban has already been quite successful. On the other hand, Apple’s management has tried to avoid throwing big bucks on new services. We have seen the slow progress of Apple TV+ despite the massive cash pile with the company. Apple has also canceled its EV car and Project Titan due to higher investment requirements.

Meta has a big advantage over Apple within the VR space due to its massive investment. Zuckerberg also has the majority voting power, and he has been ready to absorb significant negative sentiment in order to build the Reality Labs segment. It would be difficult for Apple’s management to absorb annual losses of $15-20 billion, which will have a big impact on EPS trajectory and also hurt the stock sentiment. In my opinion, Meta should be able to corner a massive market share within VR devices and build a strong product, platform, and services ecosystem that can deliver a big growth runway for the company.

Is Meta Stock Too Pricey?

Future projection for Meta stock needs to take into account the recent bull run in the stock. Meta’s stock has been showing a big bull run since hitting the bottom in 2022. The strong EPS growth momentum has allowed the stock to trade at a reasonable multiple. Meta stock is trading at only 20X the EPS estimate for fiscal year ending 2026. It is also possible that Meta will see more upward EPS revisions as the company fully utilizes its ad tools over the next few quarters. This valuation multiple does not seem pricey when we also look at the possible growth runway of the Meta’s VR efforts.

The EPS estimate of Apple for 2 fiscal years ahead is $8.3 which gives the stock a forward PE multiple of 28 for the fiscal year ending 2026. Hence, Meta is trading at a 30% discount to Apple while have a better roadmap in the AI and VR space. Microsoft has a forward PE multiple of 23 for the fiscal year ending 2026, which shows that Meta is available at a better price. Only Alphabet is cheaper than Meta, with a forward PE multiple (fiscal year 2026) of 16.5. Hence, despite the current bull run, Meta stock offers a good buying option among the big tech companies when we look at the rapid AI deployment and the potential of building a strong product, platform, and services which the VR space.

Investor Takeaway

Meta stock has outperformed other big tech stocks since the last earnings due to the actual growth metrics delivered by its new AI tools. The company is also investing heavily in VR and its efforts are now showing good results. The stock is not very expensive despite the recent bull run. For fiscal year ending 2026, Meta’s forward PE ratio is only 20 compared to 23 for Microsoft and 28 for Apple. We could also see some more upward revisions in the EPS estimate of Meta if the company continues to build better AI tools for its social media platforms. Investors looking to make a long term buy-and-hold play could find Meta as an attractive alternative.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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