7 Meta Platforms Analysts Talk Q2 Weakness In Advertising, Risk-Reward And Long-Term Growth For Reels

Analysts are sizing up Wednesday's second-quarter earnings report from Meta Platforms that cited weaker advertising spending and several macro headwinds for the social media platform.

Could growth of Reels be enough to offset revenue declines? 

The Meta Platforms Analysts: RBC analyst Brad Erickson has an Outperform rating on Meta Platforms and lowered the price target from $200 to $190.

Wells Fargo analyst Brian Fitzgerald has an Overweight rating and lowered the price target from $325 to $275.

JMP analyst Andrew Boone has a Market Outperform ratting and lowered the price target from $240 to $215.

KeyBanc analyst Justin Patterson has an Overweight rating and raised the price target from $190 to $196.

Raymond James analyst Aaron Kessler has an Outperform 2 rating and lowered the price target from $290 to $215.

Needham analyst Laura Martin has an Underperform rating and no price target.

Rosenblatt analyst Barton Crockett has a Neutral rating and lowered the price target from $177 to $156.

Related Link: Meta Platforms Misses On Q2 Earnings: User Numbers, Ad Impressions, Zuckerberg's Comments And More 

The Meta Analyst Takeaways: Erickson singles out advertising weakness as being a key negative in the quarterly report.

“Turns out advertising is weak,” Erickson said. “Meta’s data advantage vs. socials keeps us at Outperform but further advertiser weakness could cause us to get less constructive.”

Fitzgerald said Meta Platforms can come back stronger with its strong engagement and a strong position in the metaverse after posting its first-ever year-over-year revenue decline.

“We think META has the leadership/vision to adapt, having already successfully navigated the Feed and Stories transitions,” Fitzgerald said.

Boone sees results for Meta Platforms rebounding with a more disciplined approach to its costs structure and improvements in advertising.

“While we acknowledge worsening results and limited revenue visibility, we continue to believe Meta is a must-buy platform for advertisers given its user scale with nearly 3B DAUs,” Boone said.

The analyst points to the risk/reward in Meta Platforms being positive “at current levels.”

Macro headwinds impacted Meta Platform’s quarter, according to Patterson. Weakness in the advertising market and foreign exchange volatility were mentioned by the analyst as items to watch.

Kessler points to macro factors like inflation, the war in Ukraine and weaker advertising demand hurting the quarter, but not the long-term outlook.

“We continue to expect solid long-term ad growth of 5% to 10%, expect continued monetization of newer platforms and formats and we believe valuation is attractive,” Kessler said.

Martin notes Needham is one of the few analyst firms with Underperform or Sell ratings on Meta Platforms and shared reasons why there is still a bear case.

“Revenue in 2Q22 declined 1% year-over-year, the slowest revenue growth in Meta’s history,” Martin said.

Martin said Meta Platforms also has falling margins, with operating margins hitting 29% in the second quarter versus 43% in the prior year’s second quarter.

“Guidance suggests further margin compression in 2H22.”

Martin predicted revenue will decline 10% year-over-year in the third quarter.

Crockett lowered the price target after Meta Platforms turned in disappointing results despite expectations being low.

“Meta set a new low-water mark in this cycle for major media company ad trend and guide,” Crockett said.

Crockett sees sales pressure continuing for Meta Platforms for several quarters “before a return to meaningful growth.”

Growth Of Reels: One of the key positives in the quarter for Facebook was growth of Reels, a Facebook and Instagram video segment. Reels is now a $1-billion run rate business.

“With Reels still at only $1B run rate but now north of 20% of usage on Instagram and growing much faster than the core, it seems likely that the headwind is likely to continue growing,” Erickson said of the feature's market share.

Fitzgerald highlights Reels driving over 20% of time spent on Instagram and increased usage seen in the second quarter.

“Reels ad monetization efficiency is progressing faster than expected, ramping faster than the Stories monetization launch,” Fitzgerald said. 

Patterson points to strong engagement for Reels as a highlight in the quarter.

“We believe early progress at Reels suggests Meta is working through the TikTok headwind, and is positioned for mid-teens EPS growth in 2023 and 2024,” Patterson said. “While monetization remains a work in progress, management expects to monetize Reels at the same rate as Feed long-term.

While many point out the positives of Reels growth and engagement, Martin points to Reels being a headwind for the company, as it is less monetized.

“They say Reels is on a similar path (to Newsfeed), implying it will be cannibalistic to revenues/hour of time spent for the next 3-4 years,” Martin said.

META Price Action: Meta Platforms shares were down 6.09% at $159.25 Thursday afternoon. 
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