Meta’s dramatic plunge drags other tech stocks down

Shares of Meta Platforms sank nearly 15% on Thursday, sparking a sell-off in big tech stocks after the social media giant signalled its costly bet on AI would take years to pay off.

The premarket drop was set to erase more than $180bn from the company’s market value and triggered a drop of 2%-5% in shares of AI-focused firms Microsoft, Alphabet and Snap.

Meta CEO Mark Zuckerberg, who floored Wall Street in 2023 with his cost-cutting drive, said on a post-earnings call that costs would grow “meaningfully” over the coming years before the company makes “much revenue” from some of its AI products.

That stoked investor fears that Zuckerberg was plunging Meta into another costly endeavour at a time when its augmented and virtual reality business was losing billions of dollars each quarter.

“Investors were caught off guard by higher capital expenditure, exacerbated by slightly softer second-quarter revenue guide. As such, shares are entering the ‘penalty box’,” Baird Equity Research analysts said.

Meta forecast April-June revenue below estimates and raised the bottom end of its 2024 total expense forecast by $2bn on Wednesday. It also raised the top end of its capital expenditure view as it invests in data centres essential to its efforts to catch up with AI front-runners OpenAI and Microsoft.

The dour expectations follow a series of smash-hit earnings that helped Meta nearly triple its stock in 2023 and powered the biggest one-day market value gain by any company in Wall Street history, of $196bn, in February after its maiden dividend.

Still, several analysts were positive on the investments, pointing to AI-driven engagement on content such as Instagram Reels and the warm reception for its virtual assistant Meta AI and early versions of its latest large language model, Llama 3.

“We think this time it is different,” said Evercore ISI analysts. “This investment cycle comes from a position of strength, as management continues to see a healthy ad demand environment into the second quarter and improving user engagement.”

Overall, 17 analysts lowered their price targets on the stock, while eight raised their view, according to LSEG data. The median price target now stands at $525, which is about 6% higher than its previous close.

The stock has a 12-month forward price-to-earnings ratio of about 23.12, compared with Microsoft’s 31.17 and Alphabet’s 22.07. It has gained nearly 40% so far in 2024, comfortably above the benchmark S&P 500 index’s 6% gain.

“Being on the offensive with investment spending is generally great, but in internet it’s very hard to underwrite which of those investments will pay back and when,” Bernstein analyst Mark Shmulik said.

“All of this culminates with investors wondering just how long this investment cycle will last, whether the opportunity and payback is real, all against a backdrop of decelerating growth.”

Reuters