Why Analysts Are Lowering Estimates for Meta and Alphabet

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Morgan Stanley analyst Brian Nowak maintains an Overweight rating on Meta, but cuts his 2023 revenue forecasts by 5%.

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As earnings season approaches, the Street continues to ratchet down estimates for Meta and Alphabet,
as expectations for a recession-driven downturn in ad budgets continues to grow.

In the latest round of cuts, analysts at both Morgan Stanley and Credit Suisse took down their earnings forecasts and stock target prices for both Meta Platforms (ticker: META) and Alphabet (GOOGL).

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Despite the cuts, both firms continue to recommend shares of both Facebook-parent Meta and Google-parent Alphabet.

Morgan Stanley analyst Brian Nowak writes in a research note that he has reduced his overall outlook for advertising spending by 3% for this year and 6% for 2023. This isn’t the first time he has reduced his outlook—he previously cut numbers in early June.

“Signs of a weakening macro ad market continue to grow,” he writes, citing both inflation concerns and weak consumer confidence in the US and Europe.

Nowak writes that trends appear to be weakening in July from June, and that June was weaker than May.

Nowak maintains Overweight ratings on both Meta and Alphabet, but cuts his 2023 revenue forecasts by 5% for Meta and 7% for Alphabet. His target prices drop to $280 from $300 for Meta, and to $140 from $150 for Alphabet.

His view is that Q2 results won’t matter much to the stocks. “More important will be how the market feels about the achievability of ’23 estimates,” he writes.

Nowak writes that Meta is a favorite stock in the group, seeing earnings estimates already substantially reduced. He thinks improved monetization of Reels and reduced spending to protect cash flows should drive outperformance.

Likewise, Credit Suisse analyst Stephen Ju maintains Outperform ratings on both Meta and Alphabet, but cuts estimates and target prices on both.

For Alphabet, he now sees a profit of $5.72 a share in calendar 2022, and $6.31 next year, down from his previous forecast of $5.92 this year and $7.10 next year. Ju cuts his target on Alphabet shares to $143, from $170.

“We decrease our forecasts for Google’s advertising businesses as we receive marketer feedback of declining budgets owing to macro uncertainty,” Ju writes. “While the extent of ad revenue compression for Q3 2022 and beyond remains unknown, it is clear marketers are showing signs of defensive behavior.”

But he notes that some ad dollars are shifting to Google search as advertisers seek higher return on investment.

For Meta, Ju cuts his 2022 EPS estimate to $13.74 from $14.25; For next year, he now sees $14.25, down from $15.25. Ju trims his target price to $245, from $273.

He thinks June quarter results will be about in line with Street estimates, but he sees second half expectations moving lower given the macroeconomic backdrop, with “flattish” ad budget growth in Q3 from Q2.

Nonetheless, he thinks Street models for the longer term are too conservative, underestimating the long-term monetization potential for Messenger and WhatsApp, Facebook Shops and search in Facebook Marketplace.

Amid a broad rally in technology shares, Meta is up 3.7% on Tuesday, while Alphabet is 2.9% higher.

Write to Eric J. Savitz at [email protected]

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Credit: www.marketwatch.com /

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