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A sizzling summer for Meta stock (META) could extend into the fall as Wall Street rallies around the notion that shares of the Mark Zuckerberg-led tech outfit are still cheap.
“How could a stock that is now up 165% year to date possibly be one of our Top Picks?! 1) Because valuation is still cheap,” said Mark Mahaney, a veteran tech analyst at Evercore ISI.
“Meta remains much closer to a trough than a peak multiple, and we believe the Street woefully underestimates the EPS potential here,” Mahaney added as investors digest an 11% move in the stock in July.
The widely followed analyst isn’t wrong in calling out Meta’s relatively cheap price-to-earnings (P/E) multiple, which looks attractive relative to the broader market given the company’s projected future growth rate.
Meta’s stock currently trades on a P/E multiple of 19.2 times estimated calendar 2024 earnings, below the S&P 500’s level of 21. Yet, Meta is expected to grow profits significantly higher than the broader market in 2023 and 2024.
Analysts are projecting Meta’s profits will increase by 30% in 2023, accelerating to 31% growth in 2024. Earnings for the S&P 500 are expected to fall slightly in 2023 and only rise 12.5% in 2024, according to Yardeni Research.
The Meta as a “cheap” stock narrative is also supported by a peek at valuation versus recent historical norms.
Meta’s current forward price-to-earnings multiple is relatively in line with its median three-year average of 19.8 times as calculated by Mahaney. But again, Meta has the drivers in place to support better earnings growth than the 29% average over the past three years.
And the tentacles of the Meta fundamental story explain the more upbeat profit estimates by the Street.
The debut of Threads in July is being viewed as strong. Sign-up demand seems to be slowing from the initial excitement, but having millions of people engage with a new product when a formidable entrenched competitor is in the market — in this case, Elon Musk’s Twitter — is a win for the Meta bull case.
Meta will likely look to monetize Threads in 2024, execs hinted on the company’s second quarter earnings call last week.
Meanwhile, Meta joined forces with Microsoft (MSFT) to introduce its next-generation open-source large language model, Llama. Meta is right in the heart of the AI discussion, opening the door to greater profit potential.
And this innovation is coming amid a significantly streamlined cost base for Meta. The company has fired a lot of people in the past year. This aggressive cost-cutting has freed up teams to move quicker.
Meta’s CFO Susan Li told Yahoo Finance Live (video above) the company’s “year of efficiency” has set it up “to be in a good place from a cost structure perspective” and that, as a result, the business is a “faster, nimbler company.”
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.
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