Meta Platforms Stock Soars Despite Weak Business Performance

Can you believe it? Meta Platforms stock has risen by over 70% this year, outpacing the S&P 500's 7.5% growth over the same period. At first glance, it might seem like everything is going great for Meta, right? However, the reality is a bit different. In the fourth quarter, Meta reported a 4% decline in year-over-year earnings, and analysts predict that there will be another decline in the first quarter (which we'll find out on Wednesday). So, why is the stock rising so quickly despite the weak business performance?

Well, there are a couple of reasons. First, at the beginning of the year, the stock had a very low valuation, with a price-to-earnings ratio of about 10. Analysts expected the company to have double-digit growth in earnings per share over the next five years, but the low valuation didn't reflect this. The recent surge in the stock price has brought it more in line with analysts' expectations, so you could say that the stock has adjusted to a more rational valuation.

The second reason for the stock's growth is the cost-cutting efforts by Facebook, Meta's parent company. Mark Zuckerberg has made "a year of efficiency" his top management theme for 2023, and the cost reductions are expected to lead to significant earnings growth during the year, which investors believe will boost profits and support the stock's current valuation.

However, it's worth noting that Meta has continued to post disappointing results since 2021, and the stock is still down from its all-time highs. Meta's business is still facing considerable uncertainty, and there are questions about the company's long-term margin profile and sustainability. The volatility of the social media company's cost structure over the past few years also makes it difficult to predict earnings changes over the long term.

While the recent stock price increase is good news for Meta shareholders, it also means that the stakes are higher for the company to do exceptionally well going forward. Investors will be looking for more information about the company's long-term margin profile and the sustainability of its business when Meta presents its first-quarter results on Wednesday.