Investing in Meta Platforms: Why Q3 Earnings Could Signal Major Growth

Meta Platforms Inc. (META - Free Report) stands as the largest social media platform globally. Initially starting with just Facebook, the company expanded its reach by acquiring popular apps such as Instagram and WhatsApp, along with its own Messenger, which collectively make up the Meta product suite.

The technology giant is preparing to unveil its third-quarter earnings results for 2024 on October 30, right after trading hours. The stock currently holds a Zacks Rank #2 (Buy) and features a promising Earnings ESP of 2.83%.

Research indicates that stocks rated Zacks Rank #3 (Hold) or better, in conjunction with a positive Earnings ESP, have a 70% chance of exceeding earnings expectations. This positions such stocks well for appreciation post-earnings. Investors can utilize the Earnings ESP Filter to identify top stocks to consider.

Meta Platforms is making significant investments in generative artificial intelligence (AI). Some financial experts are questioning when the company will start to monetize these substantial expenditures effectively.

A potential earnings and revenue beat could significantly enhance META’s monetization strategy for AI spending. Combined with a strong Zacks Rank, this could lead to a notable increase in the stock's value in the coming months.

The following chart illustrates META's price performance from the beginning of the year.

Key Considerations for Q3 Earnings

Meta Platforms has been experiencing consistent user growth across all markets, particularly in the Asia Pacific region. The company is utilizing AI to enhance its various platform offerings, which now reach over 3.3 billion users daily. In the United States, user growth is solid, with WhatsApp surpassing 100 million monthly users and Threads nearing the 200 million user milestone.

Moreover, META is benefitting from promising growth in advertising revenue. In the second quarter of 2024, advertising revenues surged by 21.7% year-over-year, reaching $38.33 billion, making up 97.9% of total revenue. Due to its advanced AI capabilities, Meta Platforms is expected to attract increased advertising spending.

By leveraging AI and machine learning, the company is enhancing the effectiveness of its social media platforms, including WhatsApp, Instagram, Facebook, and Threads. These AI investments are crucial for Meta to capture a larger share of the digital advertising market.

Key metrics—like Family daily active users, ad impressions, and average ad prices—are anticipated to remain strong on a year-over-year basis in the third quarter, showcasing META’s dominant position in the digital advertising space.

However, it is important to note that the Meta Platforms Reality Labs division, which focuses on virtual and augmented reality as well as metaverse projects, has been a considerable financial drag. Questions linger around how Meta will achieve profitability in this sector, particularly with its focus on AI investments.

Positive Earnings Estimate Revisions for Meta

For the upcoming third-quarter report, the Zacks Consensus Estimate projects revenues of $40.16 billion, reflecting a 17.6% year-over-year increase, alongside earnings per share (EPS) of $5.17, signifying a 17.8% boost year over year. Over the previous four quarters, the company has recorded positive earnings surprises, averaging a 12.6% beat.

Furthermore, in the past week, META has seen positive revisions in earnings estimates for 2024 and 2025. Presently, the Zacks Consensus Estimates suggest a year-over-year rise of 20% for revenue and 44.2% for EPS in 2024.

The current estimates for 2025 revenue and EPS indicate an upside of 14% and 13.3%, respectively. Notably, META possesses a long-term (3-5 years) EPS growth rate of 19.1%, outpacing the S&P 500 index's growth rate of 13.1%.

Additional Catalysts for Meta Stock Growth

Meta Platforms is expected to receive shipments of NVIDIA Corp’s (NVDA - Free Report) new flagship AI chip later this year. The advanced AI chip known as Blackwell will be a key growth driver for the company. Meta is set to receive B200 Blackwell chips to support its AI initiatives.

The robust AI capabilities integrated into Meta's platforms enhance ad delivery efficiency, thereby increasing returns on advertising investments for advertisers. Strong performance in sectors like e-commerce, gaming, entertainment, and media enriches Meta's prospects.

Management has indicated plans to invest between $37 billion and $40 billion as capital expenditure in AI projects in 2024, with capital spending expected to exceed $50 billion in 2025.

On July 24, META introduced its Llama 3 AI model, which operates on NVIDIA’s latest HDX H200 chip. Notably, a $1 investment from an API provider can generate up to $7 in revenue over a period of four years. This free Llama 3 model, along with an upgraded version slated for release next year, aims to position META in competitive parity with existing players, like OpenAI.

Additionally, on October 24, Meta Platforms struck a multi-year agreement with Thomson Reuters Corp. (TRI - Free Report), allowing its AI chatbot to access news content for real-time responses to current affairs and news inquiries. This collaboration marks a significant partnership between a leading tech company and a major news publisher.

Promising Potential for Meta Shares

This year, the stock price of Meta Platforms has soared by nearly 62%, far outpacing the Zacks-defined Internet Software Industry's growth of 23.1%. Despite this impressive rise, META currently trades at an appealing valuation relative to its peers, possessing a forward price-to-earnings (P/E) ratio of 26.5X, which is lower than the industry average of 32.9X. Furthermore, META boasts a robust return on equity of 34.2%.

The average short-term price target set by brokerage firms suggests a potential rally of 9.1% from the latest closing price of $573.25, with target prices ranging from $425 to $811. This indicates a maximum upside of 41.5% and a maximum downside of 25.9%.

Meta, Earnings, AI