Meta (NASDAQ:META) stock experienced a sell-off on Wednesday, April 24, after beating earnings expectations in Q1 of 2024. However, I don’t think this sell-off was warranted, and in fact, I see it as something of a buying opportunity, given the company’s very attractive valuation metrics. Meta has the second lowest price-to-earnings-to-growth (PEG) ratio of the Magnificent Seven, and it’s not expensive in the near term at 22x forward earnings.
What Was So Bad about Meta Stock’s Q1?
The short answer is ‘nothing,’ Earnings per share (EPS) of $4.71 beat analyst estimates by $0.39, and revenue of $36.46 billion grew by 27.3% year-over-year, narrowly exceeding expectations by $240 million. However, the company’s share price fell by 15% in after-hours trading and finished the next day down over 10%.
Despite the stock price decline, the results told us that Meta’s business remains healthy. Daily active people (DAP) across the company’s family of apps increased by 7% year-over-year to an incredible 3.24 billion on average for March 2024.
Ad impressions, which represent the number of times ads are shown to users, rose by 20% year-over-year. Meanwhile, the average price per ad increased by 6% year-over-year. These metrics indicate that Meta is effectively monetizing its growing user base.
However, the share price dropped on Meta’s CapEx forecast. CEO Mark Zuckerberg said on a post-earnings call that costs would grow “meaningfully” over the coming years before the company would make “much revenue” from artificial intelligence (AI).
Investors were seemingly caught off-guard by the announcement of an AI spending splurge. And perhaps many don’t think it’s timely, especially when the company continues to lose billions on augmented reality and virtual reality projects.
In the short term, Meta’s free cash flows are set to fall with more aggressive capital spending, notably in the AI space. From a tangible perspective, full-year expenses are now set to come in at around $96-$99 billion, with CapEx of $35-40 billion. This CapEx figure reflects an increase of $5 billion at the lower end of the guidance.
META also forecasted Q2 revenue below estimates and raised the bottom end of its 2024 total expense forecast by $2 billion. Collectively, these two factors shook investors.
Meta Stock’s Valuation Remains Attractive
At one point, the sell-off in Meta stock meant it was trading as low as 18x forward earnings. Now, however, the stock has picked up, and it currently trades 22x forward earnings. That’s still cheap, considering the company’s growth trajectory, its dominant position in the social media space, and long-term tailwinds associated with AI.
Looking forward, EPS is expected to grow at an impressive rate throughout the medium term. Analyst forecasts suggest that earnings will grow at 22.1% annually over the next three to five years, which is truly exceptional for a company of its size.
Taking the price-to-earnings (P/E) ratio, analysts believe Meta is currently trading at 19x earnings for 2025, 16.3x earnings for 2026, and 14.9x earnings for 2027. Those figures certainly don’t strike me as excessive.
And then there’s the all-important PEG ratio. The forward PEG ratio is calculated by dividing the forward P/E ratio by the expected annualized growth rate through the medium term. Currently, the PEG ratio currently sits at just under 1.0x (0.995, to be exact). It’s the cheapest one of the Magnificent Seven, and it’s hard to come across PEG ratios that low in the current market.
While traditional interpretations of the PEG ratio — as popularized by legendary fund manager Peter Lynch — suggested that a ratio under one inferred that the stock was undervalued, nowadays that benchmark is often lifted to 1.5x. Taking everything into account, including the long-term tailwinds associated with AI and Meta’s dominance in the social media space, I think 1.0x is a very attractive entry point.
Is Meta Stock a Buy, According to Analysts?
Meta stock is rated as a Strong Buy on TipRanks based on 40 Buys, two Holds, and one Sell rating assigned in the past three months. The average Meta stock price target is $547.45, with a high forecast of $610.00 and a low forecast of $430.00. META’s average price target represents 24% upside potential.
The Bottom Line on Meta Stock
I believe the market overreacted to Meta’s announcement that it would be spending more on things like AI in the near term and its acceptance that these projects probably wouldn’t contribute much to net earnings for some time. Hopefully, these are only short-term changes to the company’s spending plans, and over the long run, I’d expect to see some returns from Zuckerberg’s investments in AI.
However, putting all that aside, Meta’s metrics are very attractive. It trades at just 22x forward earnings, which I don’t think is expensive, given the growth trajectory. What’s more, the all-important PEG ratio reaffirms my confidence.
