Is Meta Platform a buy after Thursday’s sell-off?

One of the hottest items of the Magnificent Seven meta platform (NASDAQ:META) cooled on Thursday after the company reported mixed results for its first quarter.

In summary, although performance was good, investors thought the near-term outlook was somewhat disappointing. As a result, Meta’s stock price plummeted about 16% on Thursday morning, falling to about $416.

Costs expected to increase

Meta Platforms, which owns the likes of Facebook and Instagram, has been on fire for the past year or so. The company’s stock price is up 194% in 2023 and up 136% over the past year. Year to date, Meta has gained about 42% before Thursday’s sell-off.

The first quarter numbers show strong growth for Meta, with revenue up 27% year over year to $36.5 billion and net income up 117% to $12.4 billion, or $4.71 per share. Costs and expenses were relatively contained, increasing only 6% year-on-year. The results beat analysts’ estimates of $36.1 billion in revenue and $4.30 in earnings per share (EPS).

Founder and CEO Mark Zuckerberg called the results “a great start to the year” in the company’s earnings report. The number of daily active users across the Meta platform increased 7% to 3.24 billion, ad impressions surged 20%, and average price per ad increased 6%.

However, the negative reaction to Meta has more to do with its outlook. The social media giant is calling for second-quarter revenue of $36.5 billion to $39 billion. At the midpoint, this outlook is slightly below the $38.3 billion consensus estimate. However, the second quarter of 2023 will still represent a 14-22% revenue increase.

A more concerning aspect of Meta’s outlook may be its cost projections. The company increased its full-year estimate to $96 billion to $99 billion from the previous $94 billion to $99 billion due to increased infrastructure and legal costs.

Susan Li, Meta’s chief financial officer, also said the company expects operating losses from its Reality Labs business to “increase meaningfully year over year due to our continued product development efforts and investments in ecosystem expansion.”

Additionally, as Meta accelerates its investment in artificial intelligence (AI), the capital expenditure range is expected to increase from the existing $30 to $37 billion to $35 to $40 billion, which is higher than initially expected.

The company did not provide guidance for beyond 2024, but Li said capital spending would continue to increase in 2025 as the company “invests aggressively to support its ambitious AI research and product development efforts.”

Want to buy the dip in meta stocks?

Last quarter, Zuckerberg said 2023 would be Meta’s “year of efficiency” as it would streamline operations to focus on new growth areas such as AI. So, although a guidance increase was not expected, this management comment does not come as a huge surprise. Still, I think Meta has taken the right steps to get to this point, and it makes sense to accelerate its investments in product development and AI.

Additionally, the social media giant would be a major beneficiary if Congress’s potential ban on TikTok actually becomes a reality. There are still many hurdles to overcome to make this happen, but Meta undoubtedly plans to be better positioned to fill that potential gap. This is definitely something to watch.

I don’t see the meta’s prospects as too worrisome in the long term. In fact, that’s not a bad thing, as the stock has gotten a little overheated, pushing its P/E ratio up to 33. I wouldn’t be surprised to see the stock rally in the coming days as investors buy the dip. The meta certainly holds up and still looks like a good buy. Now that valuations are falling, meta stocks look even better.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.