Meta Shares Near a 2-Year Low as Ad Market and TikTok Take a Toll

Meta Shares Near a 2-Year Low as Ad Market and TikTok Take a Toll

The troubles are mounting in Menlo Park.

Goal

Platforms shares continued to slide lower after the parent of Facebook and Instagram posted disappointing second quarter financial results—and warned that business is going to get worse before it gets better.

Recent financial results from

Snap

(ticker: SNAP),

Twitter

(TWTR), and

Alphabet

(GOOGL) provided vivid illustration of a recent softening of the digital advertising market, and investors had relatively low expectations for both June quarter results and the outlook for the September quarter.

Meta (META) nonetheless managed to miss the lowered bar for both periods.

Meta shares face at least six parallel issues. The most obvious one—and the one where Meta has least control—is softening advertising demand in the face of a declining global economy.

On Thursday, fresh government data showed that US GDP declined at a 0.9% annualized rate in the second quarter, which makes two quarters in a row of negative growth. That is actually the one issue Meta faces that it can be sure will eventually lift—recessions eventually end.

Meta also continues to grapple with the “loss of signal” problem tied to

Manzana
‘s

shift to a tougher privacy stance for iPhone users, making it harder for Meta to target and monitor advertising campaigns. That has spurred some ad buyers to shift dollars to other platforms.

The third big issue is that the company is losing market share—and mindshare—to TikTok. There are only 24 hours in a day, and TikTok usage is soaring.

That brings us to issue number four. The company has launched a TikTok clone called Reels, which Meta says is on a $1 billion ad revenue run-rate. But monetization of Reels is still in the early days, and it actually hurts Meta’s financial performance when users shift time from other parts of Facebook and Instagram platforms to Reels.

Meta is also copying TikTok by increasing the percentage of content in user news feeds from creators not connected to the user—not just friends and family, but random video, links and text from across the platform that Meta’s AI software has decided you might want to see.

In effect, Meta is betting that users want Facebook to be more like TikTok, which only compounds the sense that Facebook is better at duplicating innovation from others than in pioneering new experiences for users.

And then there is the fifth issue: the metaverse. The company is losing around $3 billion a quarter on its “Reality Labs” business, and success is many, many years away. And while Meta announced a second straight quarter of operating expense reductions, it basically kept its capital spending plans in place. While no one really knows if the metaverse will be worth visiting, what we do know is that it will cost billions of dollars to build, and completion will take many, many years.

Finally, the company remains the target of intense regulatory scrutiny. Overshadowed by the earnings news was the FTC’s announcement yesterday that it is filing suit to block Meta from buying Within Unlimited, which makes a virtual reality fitness app called Supernatural.

“Instead of competing on the merits, Meta is trying to buy its way to the top,” FTC Bureau of Competition Deputy Director John Newman said in a news release. “Meta already owns a best-selling virtual reality fitness app, and it had the capabilities to compete even more closely with Within’s popular Supernatural app. But Meta chose to buy market position instead of earning it on the merits. This is an illegal acquisition, and we will pursue all appropriate relief.”

If Meta plans to use M&A to build the metaverse, the FTC intends to stand in the way.

Last night, Meta posted second-quarter revenue of $28.82 billion, down 1% from a year ago, and a little below the Wall Street consensus forecast of $29 billion. The company’s guidance had called for revenue of $28 billion to $30 billion. Profits were $2.46 a share, a dime shy of consensus at $2.56 a share. For the third quarter, Meta sees revenue between $26 billion and $28.5 billion, far below Wall Street’s consensus forecast of $30.7 billion. At the bottom of the range, Meta’s revenue would be down more than 10% from the year-ago quarter.

At least 20 analysts cut their price targets on Meta shares on Thursday in response to the earnings report, but sell-side analysts remain almost universally supportive of the stock.

FactSet

shows that 97% of the analysts who follow the company rate the shares as Buy or Hold. A few of them are showing signs of strain, though—and it turns out Buy doesn’t always mean “buy right now.”

For instance, MKM Partners analyst Rohit Kulkarni maintains a Buy rating on the stock, but cuts his target to $240, from $295, and asserts that the stock is likely to remain range bound through year end.

likewise,

Mizuho
‘s

James Lee keeps a Buy rating, but cautions that “the stock could remain volatile near-term on continued macro uncertainties and a negative revision cycle.” Lee thinks the company should be more aggressive on cutting costs.

UBS analyst Lloyd Walmsley writes that he remains bullish on Meta shares overall, but that the company didn’t deliver enough in the quarter to offset “the structural overhang” in its advertising business.

“Investors need to get comfortable with top line acceleration and, more importantly, convincing engagement lifts post product changes to meaningfully move shares. We are not getting either for now,” Walmsley wrote.

He keeps his Buy rating, but cuts his target to $195, from $215.

Needham analyst Laura Martin noted in her review of the quarter she is one of the few Meta bears—she repeated her Underperform rating. She thinks Street consensus estimates remain too high. And she also views the company’s focus on building the metaverse as an issue for shareholders.

“Meta talks about the returns on its Metaverse investments in terms of 2030, well beyond most investor time frames,” she writes. “There is no need to be in Meta today if its current investments will pay off in 2030. Also, if the world changes during that period, they may never pay off. Finally, it is possible that Meta’s enormous spending to create the Metaverse suggests it fears existential risks to its historical collection of businesses.”

Meta shares are down 6.2%, to $158.95, and have traded as low as $154.85, close to a two-year low. The stock is down 53% for the year.

Write to Eric J. Savitz at eric.savitz@barrons.com

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