Meta Platforms Positioned for Growth with Recovery in Ad Spending and Positive User Engagement, Analyst Says

Truist Securities analyst Youssef Squali maintained Meta Platforms Inc META with a Buy and raised the price target from $265 to $340.

The analyst is incrementally positive on Meta, tweaked estimates, and raised his price target ahead of the 2Q23 print on July 26. It reflects a continued recovery in ad spending in 2Q and expectations for further acceleration in 2H23. 

Resilience in user engagement and early signs of success with Reels bode well for META amid favorable macro indicators, including consumer spending, unemployment, and inflation. 

Management's focus on operating efficiencies should improve margins even as META invests in priority areas like AI/ML. Squali views Threads' traction as impressive, but much work remains for it to become consequential for META. 

The 2Q results will likely show sequential improvement in resilient consumption & easier Y/Y comps. 

The analyst expects $31.2 billion in revenue in 2Q vs. $30.8 billion previously, within management's guidance of $29.5 billion - 32 billion and virtually in line with the Street consensus of $31.0 billion. 

Squali's $16.1 billion estimate for adjusted EBITDA (52% margin) is above the consensus of $15.5 billion. 

He also notes that in 2Q23, Meta has lapped the first full quarter of zero Russia revenue (Russia represented ~1.5% of total revenue in 2021) and the weaker ensuing demand globally in 2Q22, both of which provide relatively more straightforward Y/Y comps for 2Q23. 

Five days after launch on July 6, Threads reached 100 million users (per Meta), making it the fastest app ever to reach that milestone. 

Meta is following the same playbook it used to grow Instagram into a highly profitable one billion+ user platform, i.e., leveraging its existing user base to make signing up and following the same accounts seamlessly. 

After a strong start, Threads seems to have lost some steam now, with less than 25 million daily users, down 45% from its peak of ~44 million (per Sensor Tower). Similarweb also reported that time spent per user on the platform reduced in half from 20 to 10 minutes. 

While short-term gyrations in users and engagement are likely to continue as META tweaks its strategy, the strategic rationale for this move and how it may impact META's business over time is even more critical. 

At a high level, the analyst views it as essential and strategic. Meta is taking advantage of Twitter's mishaps to launch a competing digital town square platform, which CEO Mark Zuckerberg believes should have one billion+ members. 

With a differentiated use case, such a venue complements Meta's other social platforms, Facebook, Instagram, and WhatsApp. Threads are leveraging Meta's existing tech stack and will operate at a cost advantage relative to independent peers.

At scale, Threads would also be leveraging Meta's relationship with 15 million+ advertisers worldwide to drive ad revenue to the new platform, last and certainly not least.

Threads would help Meta gather massive amounts of user data, which it would use to complement existing signals and improve its ad targeting capabilities in an environment where the industry has restricted 3rd party data use.

Price Action: META shares traded higher by 0.26% at $312.88 on the last check Wednesday.