Meta reported better-than-expected sales in the fourth quarte

Despite fears of a decline in advertiser demand, the company boosted its stock-buyback program by $40 billion and projected revenue for Q1 to be between $26 billion to $28.5 billion, in-line with analyst expectations. Meta is expected to have lower expenses in 2023, which could ease investor concerns about over-spending on virtual reality projects.

We would attribute the after-hours 20% earnings rally with the following characterization: 10% due to buybacks, 5% due to shorts algorithmically covering their position, and 5% due to the earnings beat/sentiment improvement from FOMC.

While the META shares earnings pop is likely to bring great enthusiasm back into the name, META will be up about 45% YTD in the opening bell tomorrow. We believe that upside is now limited, and our bias over the next 30 days is following:

Set a stop-loss to sell existing long positions with any undercut under 175.

Tactically short the name if there is an overshoot to 205.

No desire to start/add to long positions.

We believe that adding long positioning here is only appropriate for short-term momentum trading. Meta’s P/E was 14.5X before earnings and is estimated to be around ~17X after earnings with a 20% bump in share price. I view 17X as fair if the company can execute well, but as the name gets closer to 20X P/E, the fundamentals likely will disappoint the valuation setup and position the name for a retracement.

In other words, I think the P/E multiple can expand another 17% (from 17X to 20X) in a goldilocks market environment. From there, META is most likely a strong sell based on the fact that there are other opportunities in the marketplace where expected returns adjusted for risk can be better. With competition from Google and Tik Tok, we don't currently believe that META merits a valuation (growth premium) that is higher than the broad S&P 500, which currently sells at 19X forward earnings.