• Meta platforms to reveal moderate growth in earnings

• Focus to stay on the AI front but outlook needs to brighten

• Meta stock becomes more attractive but not out of the woods yet

Why Q1 season did not go well?

The tech earnings season will heat up next week, with Facebook-parent Meta Platforms reporting its Q2 financial statements ahead of its mega tech peers Amazon and Apple on Wednesday after the market close.

The previous earnings season did not bode well for the social media giant. Despite beating analysts' expectations, the company suffered a 15% bearish correction on Wall Street after raising its 2024 capital expenditure more than expected from $30-37bln to $35-40bln, while also surprisingly lowering its revenue forecast for Q2. Consequently, investors became skeptical about the long development timelines and how profitable the AI business will be relative to its growing spending.

Of course, the stock managed to recoup its losses soon and stretch its 2022-2024 uptrend to a new record high earlier this month, though rising optimism for lower interest rates was the major tailwind behind the latest rally. Hence, given the harsh reaction to Tesla’s and Alphabet’s mixed earnings report last week, which further increased caution about the cost and benefits of the AI evolution, Meta’s guidance will remain a hot spot.

Q2 earnings estimates

Perhaps investors might be more sensitive to any potential surprises in revenue and earnings per share (EPS) this time as annual comparisons could toughen. Following a bad year in 2022, Meta Platforms returned to growth in 2023 but analysts have set the bar low for Q2.

According to consensus estimates by LSEG IBES, revenue is expected to increase to $38.2 billion in the three months to June, marking a softer annual growth of 19.7% versus 27.6% in Q1. Earnings per share (EPS) could almost stay stagnant for the second quarter around $4.71, showing a relatively softer yearly expansion of 58%.

The performance of the Reality Lab division, which is focused on augmented reality, virtual reality and metaverse for which Facebook changed its name to Meta Platforms might be of interest as well. The segment that inspired Mark Zuckerberg had been receiving billions of dollars, but it soon started to face criticism internally and from shareholders as losses ramped up, with the board announcing layoffs and spending cuts of 20% into 2026 while also changing its priority to AI products to keep up with the competition.

The lack of clear vision, signs of mismanagement and warnings of rising operational costs might weigh on market sentiment, though the world is changing and metaverse is a long-term project. Hence, Reality Labs might have a challenging period ahead, but it's unlikely to be completely out of the picture. In the meantime, annual comparisons are forecast to reveal a faster growth of 31.8% in revenue, while analysts are also optimistic that the segment could end the year in positive territory after contracting for the past two years.

In other data, a negative gross profit margin of -0.26% versus a positive 3.11% in Q1 might overall reflect persisting headwinds for the company.

Meta stock performance

As regards its performance against major US indices, Meta’s stock has been running faster than the Nasdaq 100 year-to-date, outperforming Amazon, Alphabet and Apple, but it is a weaker player when compared to chip stocks such as Nvidia and Super Microcomputer.

Nevertheless, LSEG analysts reiterate a buy rating for Meta’s stock, with several investors raising their price targets ahead of the earnings announcement. In terms of valuations, the company is now considered less expensive, trading at 20.6x its earnings compared to almost 25x at the start of July. Encouragingly, this is comfortably below the 12-month forward P/E multiple of Amazon, Microsoft, Apple and Netflix and it has recently declined below the S&P 500 average, which suggests that the stock might be less vulnerable to excessive optimism and therefore to stock crashes.

AI to remain priority

In other encouraging news, Meta recently released its new Llama 3 model free of charge, describing it as comparable to the big offerings of OpenAI and Google. It’s not completely out of restrictions as its content is limited when using commercial products and it runs 405 billion of parameters compared to some trillions of ChatGPT but it would not be surprising if investors decide to switch to something more cost-effective as the competition thrives. That said, Zuckergberg has yet to disclose the cost of the product while the model’s adjustable protection filters could add more legal pain to the company, which is on track to face its first antitrust fine in Europe.

Technical Outlook

All in all, an upbeat earnings report accompanied by encouraging guidance is what is needed to lift Meta’s stock above the 20-day exponential moving average (EMA) and back above the broken support trendline at $485. A sharper increase above 500 could then re-challenge the 2024 resistance zone between $540-$550 or chart a new high near the long-term ascending line at $560.

Alternatively, if Meta paints a blurry outlook, signaling softer earnings in the coming quarter and more AI expenses, the bears could squeeze the stock below the 200-day EMA at $430 and towards the $400 round level. The $375 region could be the next pivot point if selling forces intensify.