Meta Platforms, the entity behind social media behemoth Facebook, has recently seen a notable decline in its stock market valuation. This downturn has positioned the company as the underperformer among the elite 'Magnificent Seven' technology firms. The primary catalysts for this shift include heightened investor apprehension regarding Meta's ambitious AI expenditure strategies, unveiled during its third-quarter financial disclosure, alongside revelations that a portion of its advertising revenue stemmed from fraudulent schemes.
Meta's recent stock slump initiated after its third-quarter earnings announcement in late October. The company's revelation of a further escalation in CEO Mark Zuckerberg's artificial intelligence investment roadmap triggered an immediate negative market reaction, with shares plummeting 11% post-report. This initial drop was compounded by an additional 9% decline in subsequent trading sessions. Furthermore, Meta secured $30 billion through a bond issuance, indicating substantial capital requirements. Internal documents, as reported by Reuters, also brought to light that Meta had anticipated 10% of its 2024 revenue to originate from deceptive advertisements, casting a shadow over its operational integrity.
This challenging period has effectively erased the promising gains Meta's stock had accumulated earlier in the year. The share price is now over 23% below its mid-August peak of 796.25, relegating Meta to the lowest-performing spot within the 'Magnificent Seven'—a position previously held by Amazon. In contrast, Amazon's stock has recovered, showing a 9% year-to-date increase following its own Q3 report. Tesla and Apple also lag behind, with year-to-date gains of 6% and 8.5% respectively. Meanwhile, Google's parent company, Alphabet, leads the group with an impressive 47% rally, followed by Nvidia at 36% and Microsoft at 17%.
Despite its social media advertising segment demonstrating robust growth, with a 26% revenue increase in Q3, the core concern revolves around Meta's aggressive spending. The company informed analysts that its capital expenditures are projected to be 'significantly larger' in the coming year compared to 2025, with an estimated $71 billion already allocated for 2024. These expenditures are largely directed towards developing data centers and enhancing computing capabilities necessary for training advanced AI models, aiming to achieve what Zuckerberg describes as 'superintelligence'.
The indeterminate timeline for achieving 'superintelligence' has led some analysts to draw parallels between Meta's current AI investments and its costly metaverse ventures in 2022, which previously caused a significant dip in stock value. However, other market observers dispute this comparison. Dan Salmon, an analyst at New Street Research, acknowledged the superficial resemblance due to Zuckerberg's substantial spending and a shift towards vertical integration but highlighted crucial differences. He noted that unlike the metaverse investment, which coincided with Apple's App Tracking Transparency policy adversely affecting Meta's core business, current AI investments occur at a time when Meta is better protected against privacy-related challenges. Moreover, AI investments offer broader potential applications, such as a 'neocloud' business, making them less of a sunk cost than the metaverse if the vision doesn't fully materialize. Despite reiterating a 'buy' rating, Salmon adjusted his price target downwards, from 900 to 800, reflecting revised earnings expectations.
On the most recent trading day, Meta's stock experienced a further decline of over 2%, closing at 604.84, amidst a generally unfavorable trading environment for U.S. markets. This marks a level not seen since early May. The company's Relative Strength score has plummeted to 23 out of a possible 99, a stark contrast to its score of 89 just three months prior. Its Accumulation/Distribution Rating, which assesses price and volume changes over 13 weeks, is currently an 'E', indicating that more funds are divesting than acquiring the stock. Nevertheless, Meta maintains an IBD Composite Rating of 82 out of 99, signifying its position among growth stocks, though the top performers typically achieve a rating of 90 or higher.