• Meta reported higher than forecast daily users for Q1
• Shares had dropped almost 50% this year 
• Some analysts believe that the reward-risk outlook quite compelling

The worst may be behind for investors of the social media giant Meta Platforms (NASDAQ:). Shares of the Menlo Park, California-based behemoth surged as much as 17.5% on Thursday after the company that its flagship Facebook added more users than analysts had expected. The stock closed at $205.73.

The good news comes in opportune timing, as the owner of Facebook, Instagram, and Whatsapp is currently the second worst performer year-to-date in the group of mega-cap tech companies known as FAANG.

The pivotal point of FB’s sell-off was a highly disappointing earnings report in February when the company informed investors its core business was in jeopardy. For the first time, Facebook’s user base stopped growing. It even shrank in some markets.

But Wednesday’s earnings report told a different story. Meta reported 1.96 billion daily users for its flagship Facebook platform for the quarter that ended on Mar. 31, higher than the consensus estimate of 1.94 billion. 

A Dislocated Quality Stock

Even after Thursday’s pop, Meta stock looks relatively cheap for some analysts. At $195.50, FB trades for 16 times the estimated earnings, a valuation that seems quite appealing for a company producing a 33% net margin. 

In a note this week, Evercore ISI said that they view the reward-risk outlook for FB shares quite compelling, adding that Meta is a “classic dislocated high-quality stock.” The note added: 

“What is almost certain is that as comps ease in H2:22 + Macro/Geo-Political improve + Reels monetization begins to ramp + FB’s post-privacy ad attribution platform arises, FB’s Revenue and EPS Growth will strengthen and accelerate.”

Evercore ISI reiterated an outperform rating on Meta with a 12-month price target of $325 per share.

Despite this positive market reaction, the road to recovery for FB remains quite challenging, especially when there are some signs that advertisers have begun to cut spending amid higher and geopolitical threats to the economy.

Meta’s first quarter sales rose 7% from a year ago, marking the first time in its 10-year history that revenue grew in the single digits as a public company. The company pointed to the ongoing war in Ukraine as a factor. 

On Wednesday, Chief Operating Officer Sheryl Sandberg said on the call that making significant money from Reels will be “a multiyear journey” similar to the company’s efforts to make money from disappearing Instagram, Facebook, and Whatsapp stories.

Reels is a Facebook answer to TikTok, a Chinese-owned app that is hugely popular among teens. While usage of Reels is snowballing, the company’s advertisers haven’t been as fast to switch to the new format. 

In addition, there is a lack of visibility on Zuckerberg’s metaverse shift. We don’t know how long it will take for this massive undertaking to pay off. 

The creator of Facebook sees the platform as the next major computing shift, creating a fully immersive digital environment where users can interact virtually while they work, shop, and play games.

Meta has been diverting a significant chunk of its sales to fund this venture, hiring thousands of highly skilled workers to develop the platform. Zuckerberg reiterated yesterday that it would be years before the unit contributes meaningfully to its business.

Bottom Line

Investors should play this trade with caution. Meta’s short-term earnings outlook has improved after the company showed a positive trend in its user growth. Still, the social media giant faces many challenges that could derail this recovery.