Meta Stock Price Plunges 16% After Earnings Report. What Caused This Investor Panic?

View risk disclosures

Meta Platforms, the parent company of Facebook, saw its stock price plummet by over 16% in after-hours trading on Wednesday, April 24th, 2024. This means Meta's stock will drop from the current $493.5 to $418 when the market opens tomorrow. This dramatic drop came despite the company beating analyst expectations for first-quarter earnings.

Let's take a quick look at Meta's earnings. Meta's revenue and Earnings Per Share (EPS) for Q1 2024 came out really well, exceeding expectations by 0.64% and 8.10% respectively. In the current economy, only a few companies can achieve that. Even the year-over-year (YoY) comparison looks very positive. See the table below:

So, if Meta's earnings are this good, why is the stock down 16% after-hours? There are two reasons for this:

Lower-Than-Expected Revenue Forecast

While Meta delivered solid first-quarter results, investors were spooked by the company's forecast for the current quarter (April-June 2024). Meta predicted revenue to fall between $36.5 billion and $39 billion, with a midpoint of $37.75 billion. This represents an 18% year-over-year increase, but falls short of the $38.3 billion analysts were anticipating.

Increased Spending on Artificial Intelligence (AI)

Remember the saying 'once bitten, twice shy'? Recall the Metaverse? That new concept Mark evangelized for years? Remember how it failed miserably, resulting in a loss of $46.5 billion and about a 70% drop in its stock price? At the time, he even said, 'Pretty soon, I think we’re going to be at a point where you’re going to be there physically with some of your friends, and others will be there digitally as avatars or holograms, and they’ll feel just as present as everyone else,' but the outcome of the Metaverse hype ended in failure.

The same pattern seems to be repeating in this AI era. Meta announced it would significantly ramp up spending on AI initiatives. This includes funding for its Reality Labs division, which focuses on virtual and augmented reality projects – a sector considered crucial for the company's future but currently incurring heavy losses. Investors are currently skeptical, hence the drop in price. But will Meta succeed this time around?

Will Meta Stock Rebound?

Here are a few things that make us believe that Meta's stock will rebound strongly, but there might be a few bumps in the next few weeks.

Tiktok ban: Lawmakers recently passed a bill that could give TikTok a major shakeup. The legislation could force ByteDance, the owner of TikTok, to either sell the app's US operations or face a complete ban. This has investors buzzing about Meta, the company behind Facebook and Instagram. Why? Because if TikTok disappears, millions of users would be looking for a new social media fix. Meta's platforms, already dominant players, could be perfectly positioned to capture this audience and the advertising dollars that come with it. In short, a TikTok ban, while a big change, could be a boon for Meta's stock price.

AI is not Metaverse: While the metaverse is a futuristic concept with a lot of hype, it's still unproven and far off. AI, on the other hand, is already being used in many successful applications today, from improving ad targeting to creating more engaging content. This makes AI a safer bet for Meta. Successful AI development can directly benefit Meta's existing social media platforms, boosting user engagement and potentially leading to higher ad revenue. This, in turn, could give Meta's stock a significant boost.

Share Price vs Fair Value of META – META is currently 13.5% UNDERVALUED.

Meta's Financial Health: Even with the increase in AI expenses, Meta remains very financially healthy.

Analyst Price Targets: 53 analysts forecast that Meta stock will rise to $541.20 this year.

Conclusion: While Meta's stock price took a hit recently, there are compelling reasons to believe in a strong rebound. The potential removal of a major competitor (TikTok), coupled with Meta's focus on proven AI technology and its current undervaluation, suggests significant upside. Additionally, the company's financial health and analyst price targets paint a promising picture. However, investors should be aware of potential short-term bumps as the company navigates the evolving tech landscape. Overall, Meta's future success hinges on its ability to capitalize on these opportunities and deliver innovative solutions that attract and retain users in a competitive market.