Meta poised for another breakout, according to the charts

Published Tue, Jun 18 202412:36 PM EDTUpdated Tue, Jun 18 20241:37 PM EDT

Meta (META) is about 5% from all-time highs and technically set up for a move to break to a new record. We believe the company has regained its position as the leader in social media advertising by leveraging AI targeting, while also stabilizing its overall spend following its "year of efficiency" generating free cash flow. The company will likely remain in our holdings at Inside Edge Capital for quite some time. To understand where we stand currently, I think it's important to recap where we've been. And Meta has been on one heck of a wild ride since January 2021. The stock saw a 77% decline from the Sept. 2021 highs to the lows on November 22, but then embarked on an eye-popping 473% rally from those lows to today's price. The company has been through a ton in recent years, but the 4 main highlights are: Being hauled before Congress on privacy concerns Apple's move in 2021 to limit iPhone user tracking that crushed Meta's data pipeline for targeted advertising Being the first of mega cap growth companies through the proverbial AI buildout brick wall in 2022, and they sure got bloody Meta's commitment in 2023 as the year of efficiency in spending while regaining the position as the leader in social media advertising. Looking back to 2022, we can see the depth of the cash burn in third quarter that left only $173 million in free cash flow as the company spent to build out its Reality Labs division. Since then during its 'year of efficiency' free cash flow has been built back to about $11-$13 billion per quarter for a yearly cash flow of about $50 billion. Looking ahead to 2025, those numbers are expected to grow. Meta recently announced an expected increase in AI infrastructure spend, but as Nvidia confirmed in recent earnings reports, most of the largest growth companies are also investing in the chipmaker's products so Meta is likely to get a pass this time around. Meta is already making significant progress as its AI-generated content recommendation systems on Instagram Reels has made sharing among users increasingly popular. Further, with Apple finally entering the AI arena, this all but confirms the AI buildout is officially underway, with a long way to run. Analysts are expecting Meta to grow earnings by 14% for the next two years and revenues by about 12%. In 2025, the consensus EPS is $22.90 giving Meta an index-level forward valuation of 22.8 times earnings. What the charts say Turning back to the technicals, the daily chart is showing a strong move higher following the gap down in Q1 earnings from $493. Following that gap closure, the stock is contemplating a break through the final Fibonacci retracement of the April decline at $504. If the stock continues higher, then we see a move back to the all-time highs at $531.49, and then up to the first extension level around $568. If we fail at this breakout around $504 then the idea for this short-term rally higher is void. However, I still very much like the stock in the longer investment horizon, holding a 7% allocation in my Tactical Alpha Growth portfolio, the 3rd largest holding, and a 1.50% position in my Strategic Income and Growth portfolio that was added on Feb 2nd when the company started paying a dividend. -Todd Gordon, founder of Inside Edge Capital, LLC DISCLOSURES: (Gordon owns META personally and in his wealth management company Inside Edge Capital Management, LLC Charts.) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.