Meta pre-earnings rally masks looming capex risk
Meta shares have surged ahead of July 29 earnings on cost-cutting optimism, but investors risk another selloff if the company escalates its infrastructure spending.
Meta stock has climbed 12% over the past month, bucking a slight decline in the S&P 500, as investors position ahead of the company's July 29 earnings report. The shares have moved above their late April lows and crossed a key 200-day moving average. Despite this recent outperformance, the stock is still down 2% year to date.
The renewed bullish sentiment stems largely from aggressive internal cost reduction. "With 10% workforce reduction in May and job postings down 49% quarter over quarter in 2Q, we expect EPS upside," BofA analyst Justin Post wrote.
A reported compute partnership with Anthropic is also driving market enthusiasm. Post estimates this arrangement could support $5 billion in additional 2027 revenue from expanded AI capacity. He expects this capacity to be monetized through advertising, subscriptions, or enterprise sales.
The valuation picture offers further encouragement for buyers. Meta currently trades at a forward price-to-earnings multiple of 20.75 times, sitting below its seven-year average of 22 times. This pedestrian valuation suggests the market has already discounted much of the historical spending fears.
Post points to several potential catalysts that could lift the stock further. These include growing visibility on new revenue streams such as model licensing, subscriptions, and business agents. He also cites potential advertising revenue upside from large language model integration, LLM improvements toward frontier capabilities, and internal chip progress that could drive future cost savings.
However, this renewed optimism overlooks a critical vulnerability. The heavy infrastructure spending that triggered a sharp selloff following Meta's April first-quarter earnings report remains a central feature of the company's strategy.
Management is operating in a full-on investment mode and could easily raise its 2026 capital expenditure plans when it reports next week. Should those spending projections increase significantly, the current rally could rapidly unwind.
