The stock of Meta Platform (NASDAQ: META) drew market attention yesterday after James Cordwell, an analyst at Atlantic Equities, downgraded the stock to “neutral” from “overweight”, citing an extremely competitive environment and a sluggish growth view due to macroeconomic issues. Meta is the holding company of both Facebook and Instagram. Following the downgrade, the stock of Meta closed Tuesday’s trading session at $128.54, down $5.25 or 3.92% from its prior close.
Specifically, Cordwell, in his note to clients, has stated that competition is intensifying for online advertising revenue. The analyst, however, pointed out that the Menlo Park, California-based company will be able to negate a portion of revenue losses by cutting down costs, but Meta, as a whole, is facing headwinds to earnings growth over the upcoming two years.
With respect to competition, TikTok is viewed as the major competitor, with the analyst assessing that the Chinese short-form video hosting service provider “had around a fifth of Facebook/combined Instagram’s participation in 2021, but only a thirtieth of their monetization, demonstrating the possible risk.”
“As Reels (Instagram) commercialization accelerates and IDFA-linked barriers expire, the analyst expects the erosion of Meta’s share losses to lessen significantly. Nevertheless, Cordwell anticipates 350bp of market share losses over FY22-FY24 versus 500bp over FY20-FY22 still yields in FY23/FY24 ad dollars of $121bn/$130.9bn compared with the market’s expectation of $125.8bn/$140.3bn.”
Based on the above facts, Atlantic Equities, in addition to a downward revision of its rating, also issued a new price target of $160 per share for the stock of Meta.
In addition, Cordwell does not anticipate a revision of Meta shares’ rating in light of decreasing opportunities for the industry, continuous market share declines, and increased pressure on margins.
The company is taking a multitude of steps to maintain revenue growth. In comparison to the 30-second advertisements that Instagram Reels started debuting internationally in 2017, the latest Facebook Reels version will include advertisements of a shorter duration.
The platform is piloting four to 10-second evadable “post-loop” advertisements, displayed after the conclusion of a Reel. After the conclusion of the advertisements, the Reel will begin again and loop.
Interestingly, Russia, which has suffered severe setbacks in its war with Ukraine, has included Meta in the list of “terrorist and extremist” institutions to Rosfinmonitoring (The Federal Financial Monitoring Service of the Russian Federation).
The rating downgrade is likely to keep the stock of Meta slightly bearish in the short term.
The historical price chart shows that the stock of Meta is decreasing after facing a heavy sell-off at 180. The stock is trading below its 50-day moving average while the Chaikin money flow indicator is showing a negative reading. Consequently, we anticipate the stock of Meta to remain in a downtrend in the days ahead.
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