At face value, the top is in for Meta Platforms (NASDAQ: META). The technical picture is more than suggestive and points to an overextended market needing correction. However, given the rapid uptick in valuation, the Q3 results, and the outlook for next year, it is more likely to be a sideways consolidation than a deep, full-blown correction. The rally will continue in 2024 if it doesn’t regain traction in 2023.
The market for META is down about 15% from its highs and may fall further, but it is still above critical support. A move to critical support is less than 20% from the market top, which means no bear market, at least not yet. Meta’s stock price should rebound solidly from the 150-day moving average in this scenario, as in August. Here’s why.
Meta has a blowout quarter; all metrics outperform
Meta Platforms had a blowout quarter in Q3, with all regions and businesses contributing to growth. The company produced $34.15 billion in net revenue for a gain of 23.2% over last year. Revenue topped the consensus by 200 basis points, and strength carried through to the bottom line.
The revenue gains were driven by a 7% increase in systemwide monthly and daily active users, with Facebook users growing 5% and 3%. More importantly, ad impressions surged by 31% to more than offset the 6% decline in average ad price. On an app-by-app basis, Reels and Threads are producing for the company, with Reels hitting break even and Threads sustaining user counts near 100 million.
Meta Platforms has mega margin expansion
As strong as the user counts and ad metrics are, the margin news is even better. The company’s revenue leverage and spending shifts resulted in a 40% operating margin, double the YOY margin, which is a multi-year high. Operating margin was improved on a sequential downtick in R&D spending (still up 0.8% YOY) compounded by sequential and YOY declines in marketing and general & administrative costs. Total costs are at multi-year lows and helped drive a multi-year net income high.
The number that matters most, earnings, came in at $4.39 GAAP, a multi-year high that outpaced the consensus estimate by 2000 basis points. Compared to last year, earnings are more than double, and the strength is expected to persist.
The company didn’t give any specific guidance for the next year but expects current-year expenses to be less than anticipated. The guidance that caught the market’s attention and pressured the stock lower was a wider-than-usual target for Q4 revenue. The company forecasts $36.5 billion at the low end of the range or about 7% to 17% growth at the range's high end.
Meta Platforms leans into AI
Meta’s plans for next year are to focus on AI and how to integrate it meaningfully into the family of apps. This means new hires to support key areas (reversing 2023’s hiring freeze) and increased capital expenses. Mr. Zuckerburg says it will take time to fine-tune the experiences, but they will impact every aspect of the business. AI will be the company’s biggest investment in 2024, including headcount, but there are plans to reallocate staffing and budget from non-AI projects to help sustain improvements made in 2024.
Analysts drive Meta Platforms higher
Marketbeat.com didn’t pick up any analysts' revisions within the first 12 hours of the Q3 release, but it is unlikely the trend in sentiment will change. Meta Platforms stock received a steady string of upgrades and price target increases in 2023, leading the stock higher. The consensus target implies a 6% upside from the pre-release price action, bullish enough but fails to convey how bullish the market is.
The freshest analyst stock price targets are well above the consensus estimate and the 2023 highs. Assuming the analysts maintain their ratings and price targets, this stock should rebound soon. Assuming the analysts begin to raise their targets, the stock should rebound soon; and vigorously.
The technical outlook: Meta is in consolidation
Meta stock is at the top, but the market is not reversing. The 15% correction may be a red flag, but the 200% rally that came before suggests this is a natural and needed market-cooling correction that will lead to another rally. Critical support is at the 150-day EMA, consistent with the August lows and should produce a rebound when reached (if reached). The risk is that the market will continue to sell off, although that does not seem likely. META stock could fall to $250 or lower in that scenario before rebounding.