By Nikos Tzabouras, Senior Market Specialist at FXCM
Facebook-parent Meta Platforms NASDAQ:META faced many hardships in 2022 and its stock nosedived. However, its CEO reacted with a series of initiatives, including cost savings and renewed emphasis on artificial intelligence (AI). The recent Q2 results rubberstamped the positive impact of these changes, which have sent the stock to a massive 2023 rally, but it may have now become overbought.
Poor 2022 for Meta Platforms
The social media giant had a very bad 2022; it was a challenging year for the tech sector, combined with an aggressive monetary tightening cycle by the US Federal Reserve and other major central banks around the world.
Advertising, which is Meta’s main source of revenue, faced headwinds from high inflation, recession fears and the lasting impact of Apple’s App Tracking Transparency (ATT) policy.
Also, the pursuit of the Metaverse drained resources with little to show for it, which markets did not like, and the firm paid the price. Meta Platforms stock collapsed last year, hitting the lowest levels since November 2015.
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From Zero to Hero
Meta Platforms went “from zero to hero”, as July was its ninth consecutive profitable month, its best run since the 2012 IPO (then named Facebook).
During the first seven months of 2023, Meta has risen by nearly 165%. This eye-watering performance trumps the broader tech rally. The tech-heavy NASDAQ100 grew by around 44% in the same period, while the FAANG group gained around 64% (Meta, Apple, Amazon, Netflix, Alphabet).
A new group has been created in the media this year, the Magnificent Seven (Meta NASDAQ:META, Apple NASDAQ:AAPL, Microsoft NASDAQ:MSFT, Alphabet NASDAQ:GOOGL, Amazon NASDAQ:AMZN, Nvidia NASDAQ:NVDA, Tesla NASDAQ:TSLA), but Meta’s meteoric rise has outperformed most of those companies as well. It comes second only to chip-maker Nvidia, which rides the AI wave and its stock has more than quadrupled this year.
Business turnaround
Meta Platforms’ stock outperformance is partly a result of improved external conditions and the broader tech rebound. More importantly, it’s a reaction to a series of initiatives put in place by CEO Mark Zuckerberg in an effort to turn things around. He listened to investors who called for a downscale of the Metaverse, lower headcount and cost cuts.
He dubbed 2023 “The Year of Efficiency” which was music to the ears of markets and vowed to make the firm more agile. He slashed around 21,000 jobs, starting late last year in an effort to streamline the workforce after the pandemic boom.
Moreover, Zuckerberg shifted immediate focus away from the obscure Metaverse and into generative artificial intelligence (AI) to improve the current products and services. Zuckerberg also launched a new text-sharing application named Threads, to rival Twitter (now X). The latter has been experiencing turbulence since Elon Musk took over.
Impressive Q2 results for Meta Platforms
Meta Platforms posted impressive results for the second quarter this month, which showed that Zuckerberg’s initiatives are working as advertising headwinds subsided, margins widened, capital expenditures dropped and the 2023 estimate was lowered again, while its user base expanded further.
Reality Labs, which is responsible for delivering the Metaverse, continued to lose money, but that is now less concerning, due to the increasing revenue and the broader rationalization of costs.
Stock headwinds ahead for Meta Platforms?
Markets reacted positively to this month’s Q2 results and Meta Platforms stock moved closer to the 2021 all-time high (384.49). On the other hand, the Metaverse still burns a hole in the balance sheet, there is catching up to do on the AI front, Threads is far from taking out rival Twitter and even though the advertising environment is improving, there are still pitfalls.
Given this year’s massive rally, some now consider the stock overpriced. The daily chart shows that the Relative Strength Index (RSI) has not followed the stock price higher over the last couple of months.
This divergence could lead to a pullback towards the EMA200, but the road to that contains multiple hurdles and daily closures below it would be needed for the upside momentum to pause.
Bulls are in control and the continuation of the rally will mostly depend on the progress of the changes that Zuckerberg is implementing. It is clear that Meta has regained its mojo and markets are attracted to it again, but will need to keep delivering. If it can, then the stock has more room to run, even if a correction precedes further gains.
