Meta is ‘fighting its Cerberus’ but the big picture is brighter for Facebook parent

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Beneath Meta Platforms Inc.’s macroeconomic clouds is an existential crisis for the Facebook parent company that was on display when the technology giant delivered its latest results.

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By the time Meta META,
posted earnings Wednesday afternoon, investors already had a sense for how the choppy macroeconomic environment was impacting advertising spending at social-media companies, and they knew from other reports in the industry that TikTok has become a greater competitor for advertising dollars.

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Facebook revenue declines for the first time, and Meta’s downfall is expected to get worse

But Meta intersects with the TikTok threat in a more intimate way, as its platform is the most similar. In fact, Meta is now trying to rebuild its platforms in a TikTok model by steering attention to its own short-form Reels video format, in a move that’s drawn the ire of celebrities like Kylie Jenner and also brought some financial growing pains.

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Executives acknowledged on Meta’s Wednesday earnings call that Reels still have a lower monetization rate than more mature parts of the company’s arsenal, though they were upbeat about the transition over the long run.

“So in the near term, the faster that Reels grows, the more revenue that actually displaces from higher monetizing surfaces,” Chief Executive Mark Zuckerberg said. “Now in theory, we could mitigate the short-term headwind by pushing less hard on growing Reels, but that would be worse for our products and business longer term since we’re confident that Reels will grow engagement overall and quality and will eventually monetize “

Shares were off 4% to $162.83 in premarket trading Thursday after the company fell short of expectations with its outlook.

The Reels issue is just one of many that complicates Meta’s story in the near term, according to RBC Capital Markets analyst Brad Erickson.

“Value seekers may be tempted with likely acceleration beyond Q3 but ex-macro, reels must ramp monetization & stem TikTok share loss, targeting must improve and investors must find religion on metaverse investments before the stock breaks out of its current valuation range,” he wrote, while reiterating an outperform rating but cutting his price target to $190 from $200.

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He added that while bulls liked the 30% engagement growth for Reels that Meta executives disclosed in the quarter, bears would note from a revenue perspective that since Reels is picking up speed faster than the broader business,” it seems likely that headwind is likely to continue growing.”

Gene Munster, a former Piper Jaffray analyst who now works at venture-capital shop Loup Ventures, wrote that whether Meta is able to move eyeballs away from Stories and toward Reels “is more important than understanding the slowdown in ad spend ahead of recession, navigating the continued impact of IDFA [Apple Inc.’s privacy-related changes]modeling the tightening of costs or understanding how leadership changes will impact the company’s priorities.”

He noted that Meta has a strong track record of successfully pivoting to the latest hot trend, including when it copied Snap Inc.’s SNAP,
Stories format.

“In short, to win in social advertising over the next five years, you need to have a large audience for short-form video,” he wrote, though for now, the revenue headwind “will likely last a year and, in the back half of 2023, we should start to see stability if not an uptick in ad revenue growth.”

Wells Fargo’s Brian Fitzgerald offered that Meta was “fighting its Cerberus” as it tackled issues from ad-tracking changes to macroeconomic pressures to changing engagement trends, but he too was upbeat about the bigger picture.

“While the set-up is challenging, and we are cutting [near-term] estimates, we think META has the leadership/vision to adapt, having already successfully navigated the Feed and Stories transitions,” he wrote. “Bears may question META’s competitive edge post-iOS [Apple’s App Tracking Transparency]but we think META ultimately comes back stronger with deeper engagement across core use cases.”

He rates the stock at overweight but reduced his price target to $275 from $325.

In trimming his price target to $250 from $275, Cowen analyst John Blackledge called out a daunting array of headwinds that include the value of the dollar, inflation, a global economic slowdown, the war in Ukraine, Apple’s debilitating iOS privacy changes, and the ongoing transition to Reels, which monetizes at a lower rate vs Feed/Stories.

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“Meta is definitely not among our top picks in our coverage universe due to the many risks involved,” FBN securities analyst Shebly Seyrafi wrote, in slashing his price target to $210 from $270.

“The year-over-year drop in quarterly revenue signifies just how quickly Meta’s business has deteriorated. In addition, the reported 14% drop in average price per ad is a steep change coming on top of Q1, when ad prices dropped 8%,” Insider Intelligence principal analyst Debra Aho Williamson said.

Meta shares have fallen 18% over the past three months as the S&P 500 SPX,
has declined 6%.


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