Meta Stock Bulls Look to ‘Connect’ Event for Next Rally Catalyst

(Bloomberg) -- Meta Platforms Inc. investors have already had a rewarding year. Now, their attention is on an event this week for insights into where the stock’s record-breaking rally is heading next.

Meta’s annual Connect conference kicks off Wednesday, with industry buzz around the reveal of a prototype augmented reality eyewear product, plus the usual star turn by Chief Executive Officer Mark Zuckerberg. Attendees will want to hear the CEO’s latest updates on artificial intelligence applications and investment.

Shares of the social media company have gained about 13% from a trough in early September, hitting an all-time high close last week. Only Nvidia Corp. has fared better among the Magnificent Seven cohort than Meta’s almost 60% advance in 2024.

“Part of the reason why the stock has done as well as it has, is they’re one of the few that is tangibly benefiting from AI usage,” said Michael Sansoterra, chief investment officer at Silvant Capital Management.

The two-day conference should be a valuable opportunity to learn about Meta’s AI intentions, Sansoterra said, describing the Menlo Park, California-based company’s event as “a data point that, you know, gives you some color.”

Shares of Meta slipped as much as 0.9% in early trading Tuesday.

What Meta showcases could be the next potential catalyst on deck for megacap technology stocks as investors assess the longevity of the AI trade. Some still doubt the payoff from heavy spending by companies on this industry craze and, while Meta has been able to show that big outlays on AI are yielding results, capital expenditure remains under scrutiny.

In recent years, the Connect event hasn’t immediately triggered large stock swings in itself, but has foreshadowed Meta earnings releases heading into the fourth quarter. Two years ago, the gathering showcased a new headset and updates on the Metaverse, just ahead of a damaging earnings release where investors balked at Meta’s high spending on the technology.

Last year, Meta announced multiple AI initiatives, including its Meta AI assistant and a slew of AI chatbots on social media. About a month later, investors again showed their displeasure at Meta’s quarterly results, as it warned about economic headwinds for advertising purchases while continuing to invest heavily in AI and virtual reality.

The mood is a little different this time round. Meta seems to have convinced investors — at least for now — that it will keep seeing payoff for pouring money into new technology. During the last earnings call, Zuckerberg successfully made the case that spending on AI is helping to improve Meta’s core business, spurring gains in its stock that outpaced its megacap peers.

“The Connect conference has been more of a pivotal event for Meta, not because of the products itself, but more so from what Zuckerberg has been saying from a holistic fundamental perspective,” said David Wagner, a portfolio manager at Aptus Capital Advisors LLC.

Wall Street has long been bullish on Meta shares, but the Facebook owner has lately attracted increased analyst attention. Cantor Fitzgerald and DA Davidson both initiated coverage of Meta this month with buy-equivalent ratings.

Cantor Fitzgerald analyst Deepak Mathivanan also named the company a top pick with “further potential for upward estimate revisions and an attractive valuation,” in a Sept. 4 note.

Meta’s valuation partly explains why investors are still buying at record highs. The company trades at about 24 times forward earnings, roughly in line with its 10-year average and a discount to the 26-times ratio for the Nasdaq 100. It’s also cheaper than the approximately 29 times commanded by the Magnificent Seven Index.

“It’s not what I would consider an expensive stock,” Sansoterra said. “But it is a stock that is clearly growing better than investors thought, even a few quarters ago.”

After attracting some new bulls, Meta’s average price target is at a record high of about $574, implying about 3% further upside.

Tech Chart of the Day

As China ramps up more support to boost its ailing economy, the local internet stock sector might also see some more support. The divergence in performance between an ETF tracking Chinese internet shares and the Nasdaq QQQ ETF is among the widest thematic gaps in markets, with almost 40 percentage points of China underperformance. Concerns around online shoppers and the local economy have been too strong to allow any AI optimism to sneak into the sector for now.