Meta Has Significant Room For Revenue Ramp Up With High Margin Revenue From Search: Analyst

Credit Suisse analyst Stephen Ju maintains Meta Platforms Inc META with an Outperform, raising the price target from $220 to $251.

The analyst previews Meta’s 1Q23 results, recalibrates his estimates, and factors in the latest cost reduction initiatives. With two rounds of cost cuts already announced, the investment rationale now hinges on revenue growth outperformance. 

Ju highlighted two reasons for his optimism heading into the 4Q22 earnings cycle: Meta has essentially replaced the post-App Tracking Transparency (ATT) ~$10 billion in lost revenue with Click-to-Message. 

The reason for this optimism lies in the notion that “message load,” as he calculates the number of messages users receive quarterly based on a rate card of ~$0.05, suggests ~19. Hence he believes there is significant room for Meta to ramp revenue for Messenger and WhatsApp. 

Search revenue from a product development perspective, the most meaningful recent update lies with Instagram’s announcement that it will start to show ads within search results, which he considers should add a new stream of high-margin revenue, potentially reaching close to $1 billion over the next several years. 

Separately, Meta announced an incremental headcount reduction of 10k and updated 2023 OpEx guidance, which includes restructuring costs and hence the baseline OpEx from which the analyst should consider 2024. 

Shifting the focus to 1Q23, whereas prior checks indicated ongoing downward bias for 2023 YOY growth expectations for online advertising in the aggregate, the outlook seems to have stabilized at 0-5% (vs. 5-7% when we first started to gather feedback in Sep/Oct 2022). 

Against that backdrop, Meta seems to be garnering incremental ad spend share on the back of Advantage+.

Price Action: META shares closed higher by 1.21% at $207.84 on Thursday.