Well, I can’t imagine another major surprise move by another Magnificent Seven stock in two consecutive days.
Two days ago, Tesla experienced an earnings surge despite missing analysts’ estimates. Yet, yesterday, Meta’s shares dropped 15% during after-market hours following its results, which surpassed estimates. Revenue rose 27% year-over-year, while earnings jumped 117%.
Oktay Kavrak captured it best with this image:
Jokes aside, ‘The Intelligent Investor’ remains highly relevant because Ben Graham acknowledged that stock movements can often be incomprehensible in the short term due to human irrationality. An often-quoted line from the book encapsulates this idea: ‘In the short run, the market is a voting machine, but in the long run, it is a weighing machine.'”
There could be several reasons for the decline in Meta’s stock price.
Firstly, merely beating earnings estimates is often insufficient to trigger a stock price rally. A listed company must not only surpass earnings expectations but also provide guidance that exceeds forecasts. Meta fell short in the latter aspect.
Meta projected its Q2 2024 revenue to be between $36.5 and $39 billion, which translates to a year-over-year growth of 14-22%. Although still respectable, this indicates some deceleration in growth, as Meta has previously grown more than 22% for three consecutive quarters. This potential slowdown may prompt some short-term oriented investors to take profits now, rather than waiting for the next quarter’s results.
Secondly, Meta is increasing its spending once again. The company has revised its 2024 expense forecast from the previously projected $94-$99 billion to $96-$99 billion. Capital expenditures were also increased from $30-$37 billion to $35-$40 billion. These increases in expenses are due to Meta’s infrastructure investments aimed at supporting its AI ambitions, while developments in the metaverse (Reality Labs) are ongoing.
Investors have previously punished Meta’s stock heavily because they were not convinced by the metaverse concept, believing that Meta was diminishing its value by misallocating resources. They argue that Meta should focus on leveraging and enhancing the current advertising ecosystem it has built.
Thus, this increase in spending, particularly toward AI, reminds investors of previous disastrous stock movements. Investors who fear another significant drop in Meta’s stock prices probably jumped ship.
Thirdly, Meta’s stock is among the top five performers in the S&P 500 over the past year, having risen 134% during this period.
Considering the stock’s dramatic rise from a low of $88 in November 2023 to a 458% gain in less than two years, the significant returns might tempt investors. Given the current uncertainties about Meta’s near-term growth and increased spending, it is very tempting for investors to sell and secure their profits.
In my opinion, Meta stock is currently overvalued. If we allow for the stock’s drop and volatility to stabilize, there could be an opportunity for investors to buy at a more attractive price once again.
