With YTD gains of nearly 63%, Meta Platforms (META) is the second-best performing constituent of the “Magnificent 7” group of stocks. And if we set aside Nvidia (NVDA) – whose breathtaking rally has helped it outperform big tech peers by a large margin – Meta has actually been the best-performing Big Tech company in the “normal” universe. Meanwhile, NVDA's rally has lost steam, and the stock has failed to reach its record highs that it hit in June.

Meta stock more than doubled last year, and was the second-best performing S&P 500 Index ($SPX) constituent - behind who else but Nvidia. At this point in 2024, Meta is the only Magnificent 7 stock to feature among the top 15 S&P 500 Index stocks, apart from Nvidia.

In this article, we’ll discuss why Meta has outperformed, and whether the Mark Zuckerberg-led company can continue its stellar rally into Q4.

Why Has Meta Platforms Stock Outperformed?

Life has come full circle for Meta Platforms over the last two years. In 2022, its revenues fell YoY for the first time in history, and the stock unsurprisingly had the worst year since it went public. The rising losses in its nascent metaverse business – part of its Reality Labs segment – did not help matters, with analysts questioning the rationale for betting billions of dollars on the business with little short-term revenue visibility. 

Amid the slump in its stock price and rising exasperation among shareholders, Meta embarked on an aggressive belt-tightening initiative and cut its workforce by almost a quarter, among other measures. The company’s topline growth also picked up, while the cost-cutting measures ensured that profits rose much faster than revenue growth. Meta’s valuation multiples also expanded, as markets gave META a premium for its strong growth and artificial intelligence (AI) initiatives. On a macro level, U.S. digital ad spending picked up, and Meta also benefited from Chinese advertisers trying to reach U.S. audiences.

Meta’s AI Investments Are Paying Off

While many tech companies are still trying to figure out how to monetize their massive AI investments, Meta has been reaping the rewards from what would be its “years of AI investments." During the Q2 earnings call, Zuckerberg expressed confidence that its AI assistant would be the most used globally by the end of 2024, which he rightly said would be a “pretty big deal.”

Zuckerberg, whose net worth recently surpassed $200 billion amid the stellar rally in Meta shares, added, “The ways that it’s [AI] improving recommendations and helping people find better content, as well as making the advertising experiences more effective, I think there’s a lot of upside there.”

Meta still has a lot of growth drivers – both in the short term as well as the long term. WhatsApp has been making inroads in the U.S. market, and during the Q2 call, the company said that its monthly active users have reached 100 million domestically. Then there is Threads, which it will eventually monetize. Over the long term, the metaverse could help to drive Meta’s growth, even as the business is currently losing billions of dollars every quarter.

Meta Stock Q4 Forecast

Meta has a consensus rating of “Strong Buy” from the 45 analysts actively covering the stock. Its mean target price of $589.07, however, is only marginally higher than current price levels. 

The Facebook parent’s Street-high target price of $811 (via Rosenblatt) is 40.7% higher than Tuesday’s closing prices.

Valuations Are Not on Meta’s Side

Meta Platforms currently trades at a next-12 months (NTM) price-to-earnings (PE) multiple of 25.5x. The multiples bottomed at 12.3x in November 2022 amid the slide in Meta stock, and have since doubled. 

While Meta’s valuation multiples have historically been the lowest among Big Tech companies, that dubious distinction now lies with Alphabet (GOOG), as markets are wary of the Google parent amid the antitrust probe.

Meta’s current NTM PE multiple is higher than its five-year average of 22.4x. However, the valuations don’t look bloated (even if they're not cheap, by any standards), given the growth it brings to the table. Analysts expect Meta’s revenues to rise by nearly 20% in 2024, and while growth is expected to fall to around 14% next year, it comes on top of a larger base.

All of that said, I find Meta’s risk-reward nearly balanced now, with risks slightly skewed towards the downside. With global geopolitical tensions rising amid the worsening crisis in the Middle East, I don’t see much scope for expansion in Meta’s valuation multiples, which means its earnings will need to do the heavy lifting.

The knee-jerk AI rally has come to a halt, and investors no longer cherish every mention of the word during the earnings calls. Markets would now like to see more signs of AI monetization from Meta before the stock can continue to rally upwards.

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On the date of publication, Mohit Oberoi had a position in: META , NVDA , GOOG . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.