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Meta Platforms
made clear on its latest earnings call that the company has growing concerns about competition in short-form video from TikTok, which seems to be eating into the time social-media users commit to Meta’s Facebook and Instagram. The company also saw the number of monthly active users in the quarter drop by about 1 million, the first time that’s ever happened.
“People have a lot of choices of how they want to spend their time, and apps like TikTok are growing very quickly,” Meta (ticker: FB) CEO Mark Zuckerberg said on the call, later adding that “the thing that is somewhat unique here is that TikTok is so big as a competitor already, and continues to grow at quite a fast rate off a very large base.” Asked about the company’s ability to catch up to TikTok with its own Reels short video feature, Zuckerberg cautioned that “we face a competitor in TikTok that is a lot bigger, so it will take a while to compound and catch up there.”
Morgan Stanley analyst Brian Nowak did a deep dive on the outlook for Reels in a research note Wednesday, reiterating his Overweight rating on Meta stock, while cutting his target price on the stock to $325 from $360. He also slashed his estimates for both 2022 and 2023, trimming his revenue forecast by 5% for this year and 4% next year, while cutting his estimate for Ebitda, earnings before interest, taxes, depreciation, and amortization, by 10% for this year and15% for next year.
Nowak remains a Meta bull, with the stock trading at about 11 times his forecast for 2023 Ebitda, or earnings before interest, taxes, depreciation and amortization. And Nowak thinks the Reels strategy will pay off eventually, but getting there will take time, and he notes that the near-term impact on the company’s financial results will be considerable.
Nowak thinks Reels will reach 15% of time spent on Instagram and Facebook combined by the 2023 fourth quarter, up from 6% now. And he adds that because the company is prioritizing engagement over monetization for Reels, the shift in minutes to video will create a headwind to revenue growth—he estimates a $9 billion drag on the top line this year, and $11 billion in 2023.
Nowak’s assumption is that Reels by fourth-quarter 2023 will be monetizing at a 45% lower rate than the rest of Facebook, and 35% less than the rest of Instagram. Nowak sees ads from Reels reaching $3.6 billion this year, and $12.6 billion next year—but he also expects the company to pay out 55% of Reels gross revenue to creators.
Nowak’s view is that longer-term Reels can reach 16% of total Meta ad revenue, while pressuring gross margins in the process—as part of his call, he cuts his 2030 gross-margin forecast to 70%, from 79%.
Meanwhile, Nowak also notes that total time spent on core Facebook per user has been declining—an important consideration, he writes, given that the business still accounts for 63% of Meta’s revenue. “This, combined with existing minutes on Facebook shifting toward lower-monetizing Reels, creates a potential multiplicative negative impact on ad growth,” he writes. “In our view it will be important to continue to monitor core Facebook and Instagram time spent trends through the Reels adoption period to gauge incremental engagement.”
In Wednesday trading, Meta stock is up 0.8% to $205.18. The stock is down 39% for the year to date.
Write to Eric J. Savitz at [email protected]
Source: https://www.barrons.com/articles/tiktok-meta-stock-facebook-51646242851?siteid=yhoof2&yptr=yahoo