Meta’s shares are trading at an all-time high. Is there potential for further growth?

Meta Platforms (NASDAQ: META) stock is the only stock among the Magnificent Seven that did not fall after the release of its Q2 2024 report. The company showed robust performance over the past quarter. This article will provide a fundamental analysis of Meta Platforms, outlining its strengths and weaknesses and examining a forecast based on a technical analysis of Meta’s stock.

Meta Platforms Q2 2024 report

Meta announced solid financial Q2 2024 results. Below are the figures compared to the same period in 2023:

• Revenue – 39.74 billion USD (+22%)
• Net income – 13.46 billion USD (+73%)
• Earnings per share – 5.16 USD (+73%)
• Operating margin – 38%​ (+900 basis points)
• Advertising revenue – 38.20 billion USD (+21%)
• Number of daily active users – 3.27 billion (+7%)
• Costs and expenses – 24.22 billion USD (+7%)

Advertising remains the primary revenue stream, contributing to 96% of the company’s total revenue. The Reality Labs unit, which specialises in developing virtual and augmented reality (VR and AR) technologies, has only generated losses so far. By the end of Q2 2024 results, Reality Labs’ loss reached 4.50 billion USD, an increase of 21%.

Meta Platforms, Inc.’s forecast for Q3 2024

Meta’s Chief Financial Officer, Susan Li, forecasts revenue for Q3 2024 to be between 38.50 billion USD and 41.00 billion USD, representing a 12–20% increase compared to the same period in 2023. The Reality Labs division is expected to continue incurring operating losses, which are anticipated to grow as the company invests in new product development and expands its ecosystem.

Capital expenditures for 2024 are projected to be between 37.00 billion USD and 40.00 billion USD, 2.00 billion USD more than previously estimated. Further increases in spending are expected in 2025, as the company plans to invest in artificial intelligence research and the development of new products.

Mark Zuckerberg’s comments on Meta Platforms, Inc.’s report

Comments from Meta’s Chief Executive Officer, Mark Zuckerberg, are crucial as the company’s future direction depends on his assessment of the results and vision. Below are the key takeaways from his speech:

• Q2 – robust performance both across apps and in the business
• Facebook, Instagram, and Threads – significant annual growth in the US and globally. Active engagement of users aged 19-29 is particularly noted
• Threads – has the potential to become another major social app
• Artificial Intelligence – AI is the primary focus area. AI helps enhance the quality of recommendations and drive engagement. AI can also better predict target audiences for advertisers. Soon, AI will also be capable of generating creative advertising materials
• Meta AI Assistant – this AI assistant may become the most popular among its counterparts by the end of the year
• Ray-Ban Meta glasses – in high demand thanks to their integration with AI
• Quest 3 sales – exceeding expectations
• Augmented reality technology – is developing at a significantly slower pace compared to AI
• Metaverse – remains the company’s long-term focus

To summarise Zuckerberg’s comments, the metaverse has receded into the background, with the primary focus now on the development and introduction of artificial intelligence technologies, which will later support the company’s success in other areas.

In the seven days following the report’s release, it was announced that Meta had sold 10.50 billion USD in investment-grade bonds, marking the company’s record borrowings. This step was taken due to the high costs associated with AI development.

Meta Platforms, Inc.’s strengths and weaknesses

Considering the possibility of investing in Meta Platforms, examining the company’s strengths and weaknesses is essential. Its advantages include the following:

• Monopolistic position in the social networking market – Meta provides services to over 3 billion users, over 40% of the global population. Such a vast audience allows the company to monetise successful projects rapidly
• The Reality Labs project – is actively developing virtual and augmented reality technologies, and Meta is one of the leaders. Finalising this project will enable the company to quickly monetise the new product, thanks to its extensive user base
• Investments and AI implementation – help advertisers to allocate their budgets more efficiently, which may attract new users to the Meta platform
• Cash and cash equivalents – the company has 58.00 billion USD in reserves, providing a significant margin of safety in challenging times
• Dividends – In 2024, Meta paid dividends to its shareholders for the first time since its IPO. Previously, shareholders had only generated income from stock appreciation, but now they have an additional incentive to retain shares in their portfolio and receive dividend payouts, which may attract new investors

Meta Platforms’ business weaknesses may include the following:

• Weak income diversification – over 90% of Meta’s revenue comes from advertisers, making the company vulnerable to external factors related to the advertising market. For instance, major advertisers boycotted Facebook in 2020, negatively impacting the company’s stock price
• Regulatory pressure and legal issues – Meta Platforms faces antitrust investigations and litigations in various countries. The company is accused of monopolising the social networking market and engaging in anti-competitive practices, which increases risks and may lead to substantial fines or forced changes in the business model
• Increased competition – Meta faces intense competition from other social platforms, including Snapchat, TikTok, and Twitter. These companies are actively developing their innovative features and successfully expanding their younger audience, which could make the Meta platform less attractive and impede user retention
• Reliance on Alphabet and Apple – Meta’s apps are widely installed on devices running Android and iOS operating systems, making the company reliant on these tech giants. Restrictions on user data access by Alphabet (NASDAQ: Google) and Apple (NASDAQ: AAPL) may significantly impair Meta’s position, reducing its ability to target ads efficiently and monetise its audience
• Innovations and research – implementing ambitious VR and AR projects requires significant investments and time. These projects may ultimately be loss-making and negatively impact the company’s financial position

Although Meta’s weaknesses are substantial, Zuckerberg must be acknowledged for effectively handling the company’s challenges. Having already faced some of these issues, he can apply the experience gained to future scenarios.

Risks of investing in Meta Platforms, Inc.’s stock

The main risk for Meta Platforms is its high reliance on revenue from advertisers. JPMorgan Chase analysts have raised the likelihood of a US recession by the end of this year from 25% to 35%. If this happens, companies will begin reducing spending, negatively impacting advertising budgets. Meta’s revenues will then inevitably decline. Currently, the company lacks alternative income sources to offset such losses. The Reality Labs unit continues to incur losses and requires additional investments, increasing the financial burden on Meta Platforms.

Technical analysis of Meta Platforms, Inc.’s stock

Meta Platforms’ revenue directly depends on the economic situation in the US, as advertisers are the company’s primary revenue stream. The likelihood of a US recession by the end of 2024 is estimated at 35%, leaving only a 65% probability of expected economic conditions. Based on this, there are two scenarios: an optimistic one, which is preferred, and a pessimistic one, which implies the onset of a recession that will negatively impact Meta’s revenues and stock price.

Meta Platforms’ stock has been trading within an ascending channel since January 2023. Although growth accelerated since the beginning of 2024, a trading range between 440 and 530 USD had formed by July. The trendline has yet to be breached, indicating a persisting uptrend. The previous attempt to surpass the 530 USD resistance level failed, with the stock price falling to 440 USD. The release of the quarterly report instilled confidence in investors, pushing the price back to the 530 USD resistance level. However, this level is unlikely to be breached due to prevailing negative market sentiment.

Despite the optimistic growth scenario, Meta’s near-term stock forecast suggests a rebound from the 530 USD resistance level and a decline to the trendline. Following this, investors may increase their stock purchases at a lower price, eventually driving stock growth, leading to a breakout above the 530 USD resistance level and a further upward movement of the asset price. Since no resistance levels are above this, the next target could be 600 USD per share, while Fibonacci retracement levels point to the 700 USD mark.

Meta Platforms, Inc.’s stock analysis and forecast

A pessimistic scenario suggests a breakout below the 440 USD support level, causing Meta’s stock to fall to the 350 USD support level. Breaking below this level may aggravate the situation for bulls, potentially pushing Meta’s stock price down to 280 USD.

Summary

The Q2 2024 earnings report indicates that Zuckerberg has a financial cushion for further experimentation. Although investments in the metaverse have yet to yield significant results, Meta is now focusing on artificial intelligence. The company currently monetises AI primarily by optimising existing projects without entering new global markets. However, even in this situation, Meta has a strong chance of improving its returns in the near term, which could positively impact its stock price and dividends. If Meta Platforms finds a way to monetise AI technology effectively, it will mark a new stage in the company’s development.