Prediction: Meta Stock Will Pop After Q2 Earnings. 3 Reasons Why
Key Points
Meta's core advertising business is delivering strong growth.
The stock trades at a P/E ratio of just 19.
Meta looks poised to launch a cloud computing business.
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Meta Platforms (NASDAQ: META) is due to report earnings after the market closes today, July 29. The stock has been under pressure lately, falling nine sessions in a row, indicating skepticism about the company's capital expenditure plans, which tracks with a sell-off in Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock after that company reported negative free cash flow for the first time ever last week.
However, I think Meta is poised to pop after the earnings report. Here are three reasons why.
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1. The digital advertising market remains strong
Meta earns nearly all of its revenue from advertising. Despite the pearl-clutching over its capex spending and the losses in reality labs, its ad business continues to deliver brisk growth, driving overall revenue up 33% in the first quarter.
Alphabet reported 14% growth in advertising revenue in the second quarter, and a report from media platform Skai said paid social ad spend was up 26% in the same period, a bullish sign for Meta. Meta has been gaining market share on Google for years, and that likely continued in the second quarter. In fact, its ad revenue could soon surpass that from Google Search.
Another round of strong ad growth should help reassure investors, showing that the core business is executing at a high level.
2. The stock is cheap
Meta has historically traded at a low earnings multiple and been undervalued for its growth rate.
However, the stock looks especially cheap now, trading at a price-to-earnings ratio of just 19 after adjusting for one-time tax penalties and benefits, a roughly 30% discount to the S&P 500, which trades at a price-to-earnings ratio of 26.
After the nine-day slide over the last two weeks, the stock looks oversold. It's rare for a company growing revenue by 33%, especially one with Meta's competitive advantages, to be trading at just 19 times earnings.
3. It could announce a cloud computing business
The buzz is building around a Meta cloud computing business. CEO Mark Zuckerberg said weeks ago that offering cloud computing services is "definitely on the table," and that his company receives weekly requests from potential customers.
Following that comment, Bloomberg reported that the company is planning a cloud business to sell AI computing power. Earlier in July, The Wall Street Journal said that Meta was hiring a top executive at Amazon's cloud business, another strong indicator of its cloud ambitions.
Launching a cloud business seems like a no-brainer for the company. Cloud revenue growth is accelerating among its hyperscaler peers, as Google Cloud just reported 82% revenue growth, and a cloud business would give Meta a way to monetize the billions it's spending on AI infrastructure.
Meta has yet to make a formal announcement about its cloud business, but it could come in its Q2 earnings report. Investors are likely to cheer the news.
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Jeremy Bowman has positions in Amazon and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, and Meta Platforms. The Motley Fool has a disclosure policy.
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