Wall Street is warming up to Meta Platforms (META +1.81%) stock again. The social media giant's shares jumped immediately following its Q4 earnings report but remain in deeply negative territory since early 2022.
The operating update eased some investor concerns around growth while proving that the Facebook owner could still deliver lots of cash directly to shareholders. Meta is still generating far weaker profits, though.
Let's jump right in to see if the bulls are right to be pushing the stock price higher right now.
Faster growth
At a glance, the Q4 update doesn't look much better than Meta's Q3 announcement that investors found lacking. Revenue declined by 4% and operating income dove 49% to $6.4 billion.
Meta is still dealing with huge challenges, including slumping prices for digital advertisements. Ad prices were down 22% in Q4.
Look a bit closer, though, and you'll see reasons for optimism. Meta posted a 5% increase in daily active users to mark an acceleration over the prior-quarter's 4% uptick. That rebound suggests the company's turnaround plan is working, with help from its Reels platform.
NASDAQ: META
Key Data Points
Meta is a clear global leader in social media, too, having just passed 2 billion active users. "Our community continues to grow and I'm pleased with the strong engagement across our apps," CEO Mark Zuckerberg said in a press release.
Cash returns
The other big factor pushing the stock higher is Meta's improving cash position. While earnings are down significantly year over year, the company's spending cuts are starting to show results.
Meta now sees 2023 expenses landing as low as $89 billion, down from the prior outlook of between $94 billion and $100 billion. Capital expenditures will be between $30 billion and $33 billion, down from the prior $34 billion to $37 billion range.
META Operating Margin (TTM) data by YCharts.
Investors are seeing an immediate benefit from this lower expense rate. Meta authorized an aggressive new stock buyback program for up to $40 billion in repurchase spending. "Our management theme for 2023," Zuckerberg said, "is the 'Year of Efficiency.'"
Looking ahead
Meta isn't predicting an imminent end to the advertising slowdown, but sales trends are brightening. Q1 revenue should land between $26 billion and $28.5 billion, which is higher than most Wall Street pros were projecting. Combined with the improving cost profile, that trend implies better earnings ahead, even if economic conditions stay weak.
The big question is whether Meta can continue laying the groundwork for future growth by investing in areas like artificial intelligence (AI), data centers, and virtual reality (VR). There's a real risk that the company will be caught a step behind, thanks to its aggressive spending cuts.
If you believe management will avoid this fate, then the tech stock looks compelling right now. Shares are priced at less than four times annual sales, representing a huge discount from a year ago, even after the recent price spike.
Meta is still a giant in the tech world when it comes to earnings and cash, despite the 2022 profitability slump. Its $29 billion of operating income last year translates into an impressive 25% of sales.
If growth rates continue stabilizing, then investors can expect that figure to improve in 2023, potentially by a wide margin. Success here would pave the way for better stock returns this year and beyond.
