Meta's Investment Plans Spook Investors And Analysts — 3 Reasons Why KeyBanc Downgraded Stock

Meta Platforms Inc. META shares plunged close to 20% late on Wednesday after the company reported a third-quarter earnings miss and issued a below-consensus forecast for the running quarter.

KeyBanc Downgrades Stock: While Meta’s third-quarter results and fourth-quarter guidance were largely fine, the 2023 operating expenditure outlook and Capex guidance were meaningfully higher than expected, KeyBanc analyst Justin Patterson said.

Patterson downgraded Meta shares from Overweight to Sector Weight, citing three reasons.

• Meta would be constrained in pulling back expenses, given its AI investment, which will render the cost of revenue to be a major source of expense growth through at least 2024, the analyst said.
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• The analyst sees “family of apps” margins likely staying in the low-to mid-30% range, given the higher operating costs.
• The analyst expects free cash flow generation to be limited over the next two fiscal years.

Accordingly, Patterson lowered his 2023 and 2024 earnings per share estimate for Meta by 28% and 29%, respectively, to $7.02 and $8.94.

“Given a challenging macro landscape, higher operating costs, and execution risk, we struggle to see META trading above a 15x/12x 2023E/2024E P/E and thus downgrade to Sector Weight,” the analyst said.

Munster Says Investors Will Wait And See: Meta stock that initially reacted with a move to the upside following the earnings release reversed course and nose-dived as traders sifted through the information gleaned from the earnings call, Loup Funds’ Gene Munster said.

On the earnings call, CEO Mark Zuckerberg said engagement on the company’s apps was better than what was been reported in the media, the analyst noted. CFO David Wehner said headcount would be flat over the next year and the company would go into an aggressive investment cycle, he added.

The company expects Capex to be $34 billion to $39 billion in 2023, up from $32 billion in 2022, which suggests upcoming investment is not just in the metaverse, the venture capitalist said. The focus will be on AI, which necessitates more servers and data center, he noted.

Zuckerberg also defended the company’s investments, saying there’s a lot going on in tech that it should pursue, Munster said.

Price Action: Meta closed Wednesday's session down 5.59% at $129.82 and slumped 19.66% to $104.30, according to Benzinga Pro data.

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