Ahead of its upcoming quarterly earnings release, Meta Platforms (NASDAQ:META) stock has been zooming higher.
As a result, META has re-joined the “Trillion Dollar Club,” or the group of stocks with market caps of $1 trillion or higher.
Expectations run high that Facebook and Instagram parent will once again knock it out of the park with quarterly financial results.
There is also high optimism about the company, providing further updates on how it will capitalize on the generative AI growth trend.
Still, while there’s much that could keep the good times rolling for META investors after earnings, a post-earnings correction remains very possible. Whether due to profit taking or disappointing aspects of some or all of the earnings release.
With this, let’s see why shares may sink, not surge, later this week, and what that means for both existing and prospective investors.
META Stock Earnings: A ‘Beat and Raise’ May Not Prevent a Sell Off
Post-market on Feb. 1, Meta Platforms will release its results for the quarter ending Dec. 31, 2023. It’s not only the market that is confident about the social media giant delivering an earnings topper.
Out of 22 sell-side analysts covering META stock, 21 of them have raised their quarterly earnings forecasts over the past ninety days. As analysts like Citi’s Ronald Josey have noted, a further strengthening of the digital advertising market, plus progress with Meta’s efforts to monetize is Reels application point to stronger-than-expected results.
Last quarter, management was somewhat cautious with its Q4 2023 guidance. However, the factors that could result in an earnings beat may also lead to an upward revision to outlook. Although generative AI isn’t expected to play a big role in Meta’s Q4 fiscal results, updates regarding the company’s efforts in artificial intelligence may also elicit a positive response from investors.
While possible that a “beat and raise” quarter, plus AI updates, drive a post-earnings rally, a post-earnings sell-off also remains very possible. A “buy on the rumor, buy more on the news,” scenario isn’t guaranteed. Instead, the market may decide to “buy on the rumor, sell on the news.”
Why Investors May Decide to Take Profit
It’s easy to see why META stock investors may decide to take profit after earnings, in lieu of “letting it ride.” With the latest surge in price, Meta Platforms shares are up more than fourfold from its late 2022 lows. Now, at multi-year highs, there may be concern that returns from here could be far less stellar.
This is especially true given Meta Platforms’ current valuation. Previously trading at a valuation considerably below other tech stocks with high AI exposure, META now trades for around 27.9 times forward earnings. Sure, that still represents a valuation discount compared to names like Microsoft (NASDAQ:MSFT), which trades for 36.5 times forward earnings.
However, META’s forward multiple is now above that of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). The Google parent is Meta’s closest peer in terms of “Magnificent Seven” stocks. Although sell-side forecasts call for strong earnings growth in 2024, there is uncertainty regarding growth in 2025 and beyond.
In prior quarters, cost cutting measures like layoffs, plus the digital ad rebound, led to strong results. Going forward, strong results will hinge on success in new frontiers with high competition. Besides AI, this includes areas like augmented reality/virtual reality.
The Best Move If Sentiment Soon Shifts
So, if the META rally is at risk of slowing down/reversing course, is it time to sell if you own, avoid if you’ve yet to buy? When it comes to those who already own Meta Platforms, I wouldn’t say selling now is your best move.
While shares could deliver a sideways/negative performance in the near-term, subsequent AI-related developments may help the stock get back on track. For instance, as I argued back in December, if Meta can figure out a way to turn its AI technology into revenue streams that are not advertising-based, this could help shares re-rate to a multiple on par with names like MSFT.
With this, you may want to stick around if you currently hold a META stock position. If you’ve been thinking of buying, while now may not be the optimal time, a post-earnings period of weakness could really work to your advantage.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.