(Bloomberg) — When it comes to social media stocks, there's Meta Platforms Inc., and then there's everyone else.
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Facebook's parent company has been the best performer in the sector this year so far amid a rise in profitability. By delivering better revenue growth, it is also cheaper than smaller peers like Snap Inc. and Pinterest Inc.
But to sustain a rally that has added more than $360 billion to its market cap going, Meta will have to show it can sustain that growth when it reports earnings on Wednesday. Of particular interest to investors: seeing the return on investment from massive spending on artificial intelligence.
“The issue is still there with some of the AI initiatives and everything they're doing to continue to improve targeting and engagement,” said Hannah Howard, portfolio manager at Gabelli Funds. “There is still room for growth on the top line and continued improvement in margins. Where it is trading now, at these levels it still looks attractive.”
Shares fell as much as 2.3% on Wednesday.
In February, Meta reported massive growth in both profits and revenue in the fourth quarter, which also shows the impact of cost-cutting measures that included cutting thousands of jobs. It also announced a $50 billion buyback program and implemented a dividend. In contrast, Snap and Pinterest achieved disappointing growth.
This has led to setting high expectations that may be difficult to overcome. This time, Meta's earnings are expected to nearly double in the first quarter, while revenue is expected to grow 26%. However, both are expected to decline later in the year, according to data compiled by Bloomberg.
Investors will be looking for updates on artificial intelligence, which Meta uses to improve ad targeting. The company recently launched a new version of its AI model, which will power an in-app AI assistant.
“Meta has really evolved from a social game to an AI game, and it has a lot of tailwinds from that,” said Jay Woods, global chief strategist at Freedom Capital Markets. “In addition, although she had some increasing difficulties with her year of proficiency, she is much more proficient now.”
With the stock clearly outperforming Snap, Pinterest, and Reddit this year, Meta still looks like the bargain of the bunch. The stock trades at 23 times estimated earnings, a discount to both its 10-year average and the overall Nasdaq 100, as well as being cheaper than its social peers.
Read more: Zuckerberg avoids personal liability in meta-addiction lawsuits
While Meta faces scrutiny over the parameters of teens and children on its social media sites, it may benefit from some pending restrictions on social media. The US government aims to shut down TikTok, one of Meta's biggest competitors, with a divestment or ban bill headed to the Senate. Meanwhile, the number of daily users on X is reportedly declining, while Fidelity has reduced the value of its position in the company formerly known as Twitter.
“Meta's market share trends look good, AI trends look good, while its peers are still very hit-or-miss. When they fail, the market is unforgiving,” said David Katz, chief investment officer at Matrix Asset Advisors. “We have much less conviction in the smaller social players, who seem to be struggling.”
Technical chart for today
Tesla shares rebounded after Elon Musk pledged to launch less expensive cars late this year, alleviating concerns about disappointing earnings results and diminished growth prospects. The stock rose 12%, putting it on track for its biggest one-day gain since January 2022.
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Dividends are due Wednesday
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Amphenol
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After sales
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Imping
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– With the help of Subrat Patnaik.
(Update stock movements.)
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