Meta Platforms Stock: 3 Reasons to Sell, 3 Reasons to Buy

Meta Platforms' (META 2.05%) stock dropped 11% on April 25 after the social media leader posted its first-quarter earnings report. Revenue rose 27% year over year to $36.46 billion and exceeded analysts' estimates by $232 million. Meanwhile, earnings soared 114% to $4.71 per share and also cleared the consensus forecast by $0.35.

Meta's headline numbers looked healthy, but its softer-than-expected revenue guidance and elevated spending plans rattled the bulls. Let's review the main reasons to buy and sell Meta's stock to see if its sell-off was justified.

Image source: Getty Images.

The key numbers

Meta generated 98% of its revenue from its core advertising business in the first quarter. Ad revenue declined in 2022 as Meta grappled with Apple's iOS changes, stiff competition from ByteDance's TikTok, and the macro headwinds facing the advertising sector. But over the past year, its year-over-year growth accelerated again.

Data source: Meta Platforms. YOY = Year-over-year.

That acceleration was driven by Meta's rollout of new AI algorithms that collected more first-party data to counter Apple's iOS changes, the expansion of Reels to challenge TikTok in the short video market, and an influx of ad spending from Chinese e-commerce and gaming companies that wanted to reach more overseas customers. Meta also offset slower ad price growth by increasing the total number of ad impressions.

Its family of apps (Facebook, Messenger, Instagram, and WhatsApp) reached 3.24 billion daily active people at the end of the first quarter of 2024. That represented 2% growth from the previous quarter and 7% growth from a year earlier.

Meta continued to expand its unprofitable Reality Labs segment, which houses its augmented and virtual reality products. However, its cost-cutting measures and the expansion of its higher-margin advertising business offset that pressure -- and its operating margin expanded 13 percentage points year over year to 38% in the first quarter.

The three reasons to sell Meta

Yet, three near-term challenges spooked the bulls. First, Meta expects its revenue to only rise 14%-22% year over year in the second quarter. The midpoint of that estimate slightly missed analysts' expectations for 20% growth.

Meta's slower ad sales to Chinese advertisers, which accounted for 10% of its top line and five percentage points of its revenue growth in 2023, might be a factor in that deceleration. During the first-quarter conference call, CFO Susan Li said the company would be "lapping periods of increasingly strong demand over the course of 2024 given the recovery of China-based advertisers in 2023 from their prior pandemic-driven headwinds."

Second, Meta slightly raised its outlook for its total expenses for 2024 from $94-$99 billion to $96-$99 billion to deal with "higher infrastructure and legal costs" as it expands its AI services, racks up higher operating losses at its Reality Labs segment, and faces "increasing legal and regulatory headwinds" in the U.S. and Europe.

Lastly, Meta stopped disclosing Facebook's total number of monthly and daily active users, as well as the monthly user figures across its entire "family" of apps. Those changes suggest that Facebook's growth is stalling out -- and that Meta will need to rely more heavily on the growth of its other apps to offset that slowdown.

The three reasons to buy Meta

Despite those challenges, Meta's stock could still rally higher for three simple reasons. First, it's still growing faster than its smaller social media competitors. Analysts expect Meta's revenue to rise 18% this year, compared to 17% for Pinterest and 14% for Snap. It's also growing faster than Alphabet, which grew Google's advertising revenue 13% year over year in the first quarter of 2024. An outright ban on ByteDance's TikTok in the U.S. could also drive more users to Meta's Instagram and Reels.

Second, Meta's stock trades at just 21 times forward earnings. That's a low multiple for a company that is expected to generate 26% earnings growth this year. Alphabet, which is growing at a slower rate, has a forward multiple of 25.

Last but not least, Meta's investments in AI and metaverse technologies could pay off over the long run. It's burning a lot of cash on those projects today, but they could lock in its users and drive the next major evolution of its social media ecosystem.

Which argument makes more sense?

Meta's stock remains up more than 110% over the past 12 months after its recent post-earnings pullback, so I think its sell-off was just a panicked response to a few minor blemishes in its strong first-quarter report. In other words, Meta's decline represents a golden buying opportunity if you believe it will continue to dominate the social media and advertising markets.