We recently published a list of BofA’s Top 10 Growth Stocks with The Fastest Projected EPS Growth Rates. In this article, we are going to take a look at where Meta Platforms, Inc. (NASDAQ:META) stands against other best BofA’s top growth stocks with the fastest projected EPS growth rates.
For the stock market, if there’s one thing that can be said with some certainty, it’s that earnings and revenue growth drives share price performance. This is because a firm’s stock price is a reflection of investor estimates of its future market potential. Firms that are believed to gain market share in the future often see their share price surge in the present as investors tailor their portfolios to try to get an early position in some of the biggest names of tomorrow.
In fact, we don’t have to dig too deep to see this principle in action. The clearest example of it is in the stock of the AI chips company that’s Wall Street’s favorite AI stock so far. Its stock is up 199% year to date, 235% over the past twelve months, and 887% since the start of 2023. While all these returns are something that most–if not all–company executives would give an arm and a leg for, to see our principle in action, we’ll have to dig deeper into the 887% share price gain.
Narrowing down our analysis to this stock’s performance in 2023–from the start and to the end of the year–its shares gained 239%. During the first half, they gained 189.5% and during Q1, the stock was up 90%. So, the shares’ performance in Q2 has proven crucial as the starting point of a rally that has so far yielded an 887% share price appreciation. During Q2, the stock was up 52%, driven by the fact that on May 24th, 2023 (during the Q1FY24 earnings), the firm’s CEO stunned investors when he shared that “A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.”
This meant that CEO Jensen Huang believed that in the future, businesses would spend as much as $1 trillion on his company’s products. Investors were ecstatic and they piled into the company to send its shares soaring by 24.6% between May 19th and May 26th. In this company’s case, the CEO’s optimism was also met by cold, hard results. During the same Q1, the firm’s data center business division revenue jumped by 14% annually, in a sign that foretold the growth story of the next quarters. Mind you, this fiscal Q1 was only the second quarter following OpenAI’s public ChatGPT release, so the AI wave that solidified in Q4 2024 was in its infancy.
These hard results saw the firm annually grow its revenue by 101%, 206%, 265%, 262%, and 122% in its Q2FY24, Q3FY24, Q4FY24, Q1FY25, and Q2FY25, respectively. The top line growth has been accompanied by bottom line profits also jumping by triple digit percentages in all of the quarters. The highest reading was for Q2FY24 when its non-GAAP net income jumped by 843% year-over-year.
Thus, it’s safe to say that growth is rewarded by the stock market. Yet, the high investor expectations for growth stocks also mean that they are punished harder in case they fail to meet expectations. Research from the University of Michigan analyzed data for 13 years covering consensus earnings forecasts, quarterly earnings, stock prices, market to book ratio, and price to earnings ratio to check whether growth and value stocks perform similarly if they fail to meet earnings expectations.
Their results show that growth stocks tend to fall more than value stocks when it comes to negative earnings surprises. The researchers add that the underperformance is typically before the earnings are announced since growth stocks typically preannounce their negative earnings surprise. A descriptive analysis of their data also shows that cumulative stock returns for the days between two earnings cycles are higher for low growth stocks over high growth stocks. For the lowest growth stocks, the cumulative returns for all firms analyzed were 0.66%, while those for firms with negative and positive earnings surprises were -3.57% and 5.44%, respectively. For the high growth stocks, cumulative returns for all firms were -0.58%, and the returns for those with negative and positive earnings surprises were -7.32% and 6.32%, respectively.
The research concisely sums up the potential of investing in growth stocks and the accompanying risks. Returning to our GPU designer, while right now it’s at the center of the AI buzz, back in 2017 and 2018, it was at the center of the Bitcoin rush since gaming GPUs could also be used to mine cryptocurrencies. However, between mid-December 2017 and mid-December 2018, Bitcoin’s price dropped by 83%. For the firm’s quarter that ended in January 2019, this led to its gaming GPU revenue dropping by 45% year-over-year and 46% sequentially. This was because the crypto sector had over ordered GPUs, but as Bitcoin prices fell, mining became unprofitable and the over-ordering led to a glut in the market. Looking at the firm’s post split stock price, this led to the stock falling by 53% between October and the end of December 2018.
Our Methodology
To make our list of BofA’s top growth stock picks, we used the bank’s latest list of stocks that are rated Buy, have an EPS surprise rating, and the highest projected growth rates for the next five years. The stocks were ranked by their projected EPS growth rates.
For these stocks, we have also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A team of developers working in unison to create the company’s messaging application.
Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Holders In Q2 2024: 219
Projected EPS Growth Rate: 21.6%
Meta Platforms, Inc. (NASDAQ:META) is the biggest social media company in the world. Its 3.2 billion user base means that the firm is the go-to platform for advertisers. Meta Platforms, Inc. (NASDAQ:META)’s dominance in social media advertising has enabled the firm to accumulate sizable resources which enable it to develop leading edge technologies such as artificial intelligence. As of the latest quarter, the firm had $32 billion in cash and equivalents. These allow it to establish sizable data centers to train AI, and Meta Platforms, Inc. (NASDAQ:META) is one of the few firms in the world that has developed its foundational AI model. Called Llama, it allows the firm to provide AI software to others to build their products. It also enables Meta Platforms, Inc. (NASDAQ:META) to blend AI into its products for advertisers by enabling them to use AI for features such as ad campaigns and customer support. It also enables the firm to provide AI features, such as image editing, to users with the hope of monetizing it in the future.
Polen Capital mentioned Meta Platforms, Inc. (NASDAQ:META) in its Q2 2024 investor letter. Here is what the fund said:
“Meta Platforms delivered robust results in the period, with revenue growth accelerating in the first quarter. However, revenue comparisons for Meta will become more difficult from here, and its guidance for 2Q revenue fell below market expectations. After the company’s “year of efficiency,” where it cut costs in its core business, management is now indicating another ramp-up in GenAI and metaverse spending, spurring concerns about future profit margins. Metaverse spending, by our calculations, is now over $20 billion per year with little to no expected return on the foreseeable horizon.”
Overall, META ranks 8th on our list of best BofA’s top growth stocks with the fastest projected EPS growth rates. META is one of the top stocks with the highest consensus earnings growth according to BofA. While we acknowledge the potential of META as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than META but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.