Meta Platforms Inc (NASDAQ:FB) is likely to be past peak risk from its competitor TikTok but the company faces challenges from its massive spending on the Metaverse and the weak macroeconomic backdrop, according to analysts from Oppenheimer & Co Inc.
Following the release of Meta’s 3Q results on Wednesday, Oppenheimer analysts rated the stock 'Outperform' but lowered their 12 to 18-month price target from $190 to $140 due to the company's much higher investments in Facebook Reality Labs and its conservative 2023 operating expenses (opex) guidance which assumes 18 x 23E GAAP earnings per share excluding real estate consolidation expenses.
Meta stock plunged almost 24% in after-hours trading overnight, falling to about $98.90 per share shortly before the market opened on Thursday.
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“While opex/capital expenditure (capex) guidance is very disappointing, we think META is past peak TikTok pressure, as 3Q family daily average users (DAU) increased 4% year-over-year (y/y), same as 2Q, while Facebook DAU +3% y/y,” the analysts wrote in a note to investors.
“Reels at $3 billion revenue run-rate are expected to be revenue-accretive in 12 to 18 months.”
The analysts added that they expected to see Facebook Reality Labs consume about 40% of Meta's core operating profit in 2023, with the drag slowing in 2024.
“If Zuckerberg pulls back on massive Metaverse spending, shareholders would see even more upside in the stock,” the analysts wrote.
“While META's historical advantage has been the social graph and the ability to share and follow pictures and videos uploaded by users, the company now believes it must evolve to use advanced algorithms to deliver content to users and leverage its social graph in the Metaverse.”
Advertising pressure and increased investment impacted performance
Analysts at Canaccord Genuity (TSX:CF, LSE:CF) have maintained their 'Buy' rating on the stock and lowered their price target from $250 to $200 following the company's 3Q results, noting the impact of advertising pressure and increased investment on Meta’s performance.
“Strength within the healthcare and travel verticals was offset by weakness from eCommerce, gaming, financial services, and CPG, and reels continues to serve as a headwind to ad growth, although the monetization gap is closing and reels recently surpassed a $3 billion annual run rate,” the analysts wrote in a note to clients.
They noted that investors appeared most concerned with Meta’s FY23 expense outlook, with total expenses and capex both well above consensus and commentary that Facebook Reality Labs' losses would grow significantly next year
“Shares of META reached fresh six-year lows after hours, reflecting the step-up in metaverse investments despite near-term challenges to the core ads business,” they wrote.
“However, while it may take a few more quarters to return to revenue growth, improving reels monetization, the lapping of Apple's privacy changes, and a reasonable valuation should contribute to a favorable risk/reward profile for long-term investors.”
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