Meta's 20-Day Rally as Obsession with AI Monetization Continues: When is the Pullback?

Meta's shares have achieved a 20-day rally, marking an impressive 25% YTD gain and leading the Mag 7. Investors have rewarded Meta for its early success in AI monetization, being a major beneficiary of frontier AI models following DeepSeek's optimization, and its enormous addressable markets in AI-supported core businesses and related hardware. With its valuation remaining reasonable and momentum continuing, it's no surprise that Meta's market cap could reach $2 trillion in the near term. However, with technical bullishness becoming more extreme, a near-term pullback is closer, and even a burst if enthusiasm persists. How can it be leveraged for another bull run? Here's our analysis.

Investors are weighing AI developments in a balanced manner, with companies like Microsoft, Amazon, and Google facing some penalty due to their eagerness to increase AI spending without clear monetization prospects. Meta's Q4 earnings, however, speak volumes: a 21% y/y sales increase to $48.4 billion, alongside a 50% y/y growth in EPS to $8.02. Mark Zuckerberg's roadmap is clear: create personalized AI assistants to enhance user experience and engagement, while using AI tools to deliver more effective commercialization to users. The early results are promising, with ad impressions and the average price per ad rising by 6% and 14%, respectively, in Q4.

And this journey is only just beginning. With more than 3.3 billion daily active people across its family of apps, Meta is poised to continue leveraging its vast user base to boost AI monetization rates and drive growth. Meta is also exploring AI-powered glasses and VR headsets to bridge the virtual and real worlds, even venturing into humanoid robotics. Although Meta's hardware efforts have faced challenges, the current bullish momentum works in its favor.

Despite the 20-day rally, Meta's valuation remains reasonable. Based on Q4 sales, its price-to-sales (P/S) ratio is under 10, which is below Tesla's 11 and Nvidia's 24. Additionally, its price-to-earnings (P/E) ratio stands at around 31, a level seen in June 2023. This suggests that investors may accept the current valuation, at least until the next earnings report, with the market awaiting positive results. 

However, the current winning streak may be approaching a pause, despite the reasonable valuation. The current RSI is above 97, a level Meta has ever reached in the past. Extreme RSI levels indicate that short-term enthusiasm may be overblown and a pullback could be imminent. For example, when Meta's RSI reached around 94 in June 2023, the stock dropped by 6% within 4 days. As investor sentiment calms, the next bull phase may begin, which is often a healthy sign for the stock.

If a short-term pullback does not materialize or if the momentum intensifies, it could signal a deeper downturn for the stock. The hype surrounding Meta's AI success might become too excessive to sustain. Historically, investors have often been overly fixated on psychological milestones; for example, when Apple and Nvidia first crossed $2 trillion and $3 trillion in market cap, respectively, investors and large funds quickly sold their positions, and the stocks experienced short-term pressure. Specifically, Apple dropped 4% after hitting $3 trillion in June 2023, and struggled until May 2024 before stabilizing above that level. Meta needs just another 6% to surpass the $2 trillion market cap, and if investors are eager to make that happen, a sharp pullback becomes more likely.

Another point of focus is when Meta's current winning cycle will conclude. Over the past 18 trading days, Meta has briefly turned red intra-day but has ultimately closed higher each time, signaling investor bullishness and confidence. However, if the stock fails to maintain its winning streak, the momentum may flip, marking another pullback signal.

In conclusion, Meta's fundamentals are strong as AI monetization continues on track, justifying the significant spending. However, technical indicators and the 20-day winning streak suggest that investors may be too obsessed with pushing the stock higher. When confidence begins to wane, the pullback will likely occur, which could happen as Meta nears the $2 trillion mark or as the stock completes its current cycle.