At a time when tech investors still have a skeptical eye turned toward many companies, Meta Platforms (META -0.13%) has pulled off an impressive 95% share-price run year to date. But why, exactly, are investors optimistic about this company right now?
Let's take a closer look at the recent enthusiasm to see if Meta's underlying business is actually back on track and what investors should still be on the lookout for.
Image source: Getty Images.
Why Meta's stock is soaring
Meta's share-price surge began back in February after CEO Mark Zuckerberg said on the company's fourth-quarter earnings call that 2023 would be the "year of efficiency." He added that the cost-cutting that was implemented at the end of 2022 "was the beginning of our focus on efficiency and not the end."
Most of the spending cutbacks Meta implemented came from two rounds of layoffs. The first was implemented at the end of last year, and a new round -- which totaled 10,000 employees -- was cut in March. Additional spending cuts have come from scaling back on some projects and not hiring an additional 5,000 positions that were previously open.
When there's a tight economic environment as we have right now, investors like to see a company rein in its spending. This is one of the main reasons why Meta's share price has soared year to date.
Adding to that optimism, Meta beat revenue expectations in the first quarter. The company reported sales of $28.7 billion, which was a modest increase of 3% from the year-ago quarter but also surpassed analysts' consensus estimate of $27.7 billion.
Finally, Meta's stock has benefited from the company's recent focus on artificial intelligence (AI). Zuckerberg said in February that "AI is the foundation of our discovery engine and our ads business -- and we also think it's going to enable many new products and additional transformations within our apps."
Meta says that AI has already helped it increase its monetization efficiency for Reels on Facebook by 40% and on Instagram by 30%.
What Meta investors should be watching
One of the first things Meta shareholders should continue to keep an eye on is the company's social media rival TikTok. Some state governments and other organizations have already implemented bans on the app, and an all-out ban on TikTok in the U.S. is not out of the question, based on security concerns.
If TikTok continues to catch negative attention from government officials, it will likely only be a good thing for Meta as the company looks to build on its recent user gains. However, if it starts to look like TikTok will be in the clear, then Meta may have more difficulties ahead in adding to its user base.
Additionally, while Meta is focused on being more efficient and spending less money right now, it's still throwing a ton of cash at the metaverse. The company's metaverse-focused Reality Labs segment lost $13.7 billion last year and $4 billion in the first quarter of this year.
Some have speculated that the metaverse is already a flop, but even if it isn't, the clear momentum in the tech industry is around artificial intelligence right now. While Meta appears to be using AI to further its ad business, it's still unclear where the company will end up in the AI race.
Current shareholders should be pleased with the latest gains. However, they should also keep a close eye on the company's metaverse spending, as well as the persistent threat from TikTok, before they get too comfortable with Meta's recent run.
