Meta stock (META) plunged as sentiment turned against big tech companies in July, but bounced back after the earnings release. In hindsight, it seems like I missed a golden opportunity to invest more in one of the top-performing tech stocks. However, given the favorable earnings numbers, cash reserves, and increasing returns from its artificial intelligence (AI) investments, I’m still bullish on Meta even after the price has risen back above $500.

Meta tops the list of the Magnificent Seven

To support my bullish view of Meta, it’s important to understand how the company stands out from other tech giants despite mixed performances. Six of the “Magnificent Seven” stocks have reported earnings for the last quarter, with overall results varying widely. Meta, which reported earnings on July 31, emerged as a standout performer among its peers.

Although Amazon (AMZN) and Microsoft (MSFT) also beat earnings expectations, their results caused some caution in the market. Amazon’s revenue numbers fell short of forecasts, dampening enthusiasm about the company’s performance. Microsoft’s forecast of slower growth for Azure also raised some red flags among investors, distracting focus from the company’s otherwise solid earnings.

Following these mixed signals, Apple (AAPL) and Alphabet (GOOGL) reported earnings increases that initially appeared promising. However, concerns about their fundamental performance remained, causing their results to fall short of broader market expectations despite their strong financials.

In contrast, Tesla (TSLA) continued to struggle, missing earnings estimates for the fourth consecutive quarter. This continued underperformance added to the uncertainty and volatility in the technology sector.

While we await further clarity, Nvidia (NVDA), the final member of the Magnificent Seven, has yet to report earnings. This missing piece of the earnings season puzzle has investors and analysts eagerly awaiting insights that could influence the final assessment of the technology sector’s performance.

Meta’s profit forecast significantly exceeded

Meta’s impressive earnings numbers further support my bullish thesis by demonstrating the company’s strong financial performance and resilience. Meta shares rose 9% in early trading following the earnings release. The company reported GAAP earnings per share (EPS) of $5.16, beating estimates by $0.40. Revenue rose 22.1% year over year to $39.07 billion, beating forecasts by $760 million.

This performance was driven by a 10% increase in ad impressions and average price per ad, showing a revival in Meta’s digital advertising business, partly due to advances in AI. In addition, the company reported a 7% year-over-year increase in daily active users, reaching 3.27 billion in June 2024.

Meta now expects third-quarter revenue to be between $38.5 billion and $41 billion, broadly in line with the consensus estimate of $39.18 billion but factoring in a 2% foreign currency headwind.

Meta pumps AI spending again

Meta’s impressive earnings are a huge achievement, but let’s take a closer look at why this is just the tip of the iceberg. A key factor in this optimism is Meta’s significant investment in AI. Although there were concerns about increased AI spending last quarter, promising results are now emerging.

In fact, these investments are already producing impressive results. “We had a strong quarter and Meta AI is on track to be the most used AI assistant in the world by year-end,” CEO Mark Zuckerberg said after the release. This statement underscores the tangible progress Meta is making and further fuels the positive forecast.

Building on that, the company’s AI efforts have paid off in many ways. Not only have they increased advertising efficiency, but they have also led to innovations like the Meta AI assistant, built with Llama 3. CFO Susan Li pointed out that Meta AI is now available in over 20 countries and eight languages, which shows how quickly these advances are spreading.

Looking ahead, Meta’s commitment to AI remains strong. The company has increased the lower bound of its capital expenditures for the year from $35 billion to $40 billion. Given the initial positive returns from these investments, this increase in spending is now seen as a strategic move rather than a risk, reassuring investors about the company’s growth trajectory.

Is Meta Stock Valuable?

When it comes to evaluating Meta stock, my bullish thesis revolves around its valuation. With an average price-to-earnings (P/E) ratio of 31.9 (NASDAQ) and 24.2 (S&P 500), Meta, an AI-focused tech giant with net cash of $39.7 billion, looks like a bargain at just 26.4 (TTM earnings) and 24.4 (forward earnings).

Furthermore, the expected earnings growth rate is in line with this optimistic view. Analysts are forecasting a medium-term earnings growth rate of 19.5% on an annualized basis. With earnings per share expected to exceed $30 by 2027, the stock has a price-to-earnings-growth (PEG) ratio of 1.25.

This PEG ratio puts Meta on par with Alphabet, offers a premium to Nvidia – which may be riskier due to its high near-term valuation – and comes at a lower price compared to the other Magnificent Seven. While a PEG ratio below one often signals undervaluation, I’m willing to be more flexible on this metric when evaluating large technology companies and those with robust long-term growth prospects.

Is Meta stock a buy?

On TipRanks, Meta is rated a strong buy based on 24 buy recommendations, two hold recommendations, and two sell recommendations given by analysts over the past three months. The average price target for Meta shares is $549.35, implying an upside potential of 6.5%.

See META analyst ratings

The conclusion on Meta Stock

Meta stock still looks attractive despite the bounce from its July lows. The stock’s P/E and PEG ratios suggest the company is undervalued relative to its peers and the overall market. Given its growth rate and significant cash reserves, I would expect Meta to trade at a higher premium than the S&P 500.

Zuckerberg’s company also appears to be benefiting from its investments in AI, with strong increases in both ad impressions and the monetization of advertising opportunities.

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