JPMorgan Sees Better Days Ahead for Meta Platforms Stock after a Dismal 2022

With a YTD loss of almost 65%, Meta Platforms is the worst-performing FAANG stock of the year and among the top S&P 500 loser. After a tumultuous year, JPMorgan predicts better days ahead for the social media giant.

Meta Platforms is facing both bottomline and topline pressures amid multiple macro headwinds. It reported revenues of $27.71 billion in the third quarter of 2022, a YoY fall of 4%. In constant currency terms, the company’s revenues rose 2%. Nonetheless, it was the second consecutive quarter where Meta Platforms’ revenues fell on a YoY basis.

Meta Platforms Q3 2022 earnings

Meta Platforms posted an operating income of $5.66 billion, which was 46% below the corresponding quarter last year. Its net income also halved to $4.39 billion and the adjusted EPS came in at $1.64 which was below the $1.89 that analysts were expecting.

Looking at the operating metrics, Meta Platforms had DAUs (daily active users) of 1.98 billion in the quarter which is in line with estimates. However, the MAUs (monthly active users) were 2.96 billion, slightly ahead of the 2.94 billion that analysts were expecting. The company’s ARPU (average revenue per user) was $9.41 while analysts were expecting the metric at $9.83.

Meta Platforms’ DAUs have sagged for the last couple of quarters as the company grapples with peak penetration.

In his comments, the company’s CEO Mark Zuckerburg said, “Across the family, some apps may be saturated in some countries or some demographics, but overall, our apps continue to grow from a large base.”

JPMorgan sees better days ahead for Meta Platforms stock

Meanwhile, even as Meta Platforms is facing multiple headwinds, JPMorgan finds it a good stock to buy. JPMorgan analyst Doug Anmuth admitted to the challenges that Meta Platforms is facing.

In a client note, he said, “Meta has been impacted by Apple privacy changes, TikTok competition, Reels headwinds, heavy hiring & expense growth, an uncertain build-out of the metaverse, and macro pressures.”

However, he upgraded the stock from equal weight to overweight and increased his target price from $115 to $150. Anmuth added, “heading into 2023, we believe some of these top and bottom-line pressures will ease, and most importantly, Meta is showing encouraging signs of increasing cost discipline, we believe with more to come.”

TikTok competition

Notably, TikTok is giving a tough fight to YouTube, Snap, as well as Facebook. In the Q3 2022 earnings call, Meta Platforms said that “Reels” has helped it increase engagement in the platform. It added that 140 billion Reels are played daily across Facebook and Instagram, which is 50% higher than what it was six months ago.

Zuckerburg added, “the trends look good here, and we believe that we’re gaining time spent share on competitors like TikTok.” However, the monetization on Reels is lower than on Feeds and Stories. He however added that the combined run rate on Reels is now $3 billion.

TikTok ban would be a positive for Meta Platforms

Commenting on the competition from TikTok, JPMorgan said, “Heading into 2023, Meta should be comping peak TikTok impact early in the year, and we believe overall Meta engagement remains solid, with time spent per user stabilizing

Notably, US lawmakers have announced a bill to ban TikTok in the US. Nancy Pelosi wants the proposal to ban TikTok on government devices to be added as part of the funding bill. Meta Platforms has seen upwards price action as US lawmakers look to act against what they say is the national security threat from TikTok. An increasing number of US states are banning TikTok from state devices.

Incidentally, India banned TikTok in 2020 after a border clash with China. Anmuth believes that a US ban on TikTok would be positive for Meta Platforms. He said, “While a full TikTok ban still seems unlikely, the possibility is increasing & Meta would be a primary beneficiary.”

Meta Platforms’ growth has sagged

Meta Platforms forecasted revenues between $30-$32.5 billion in the fourth quarter, which was lower than what analysts were expecting. The company said, “Our guidance assumes foreign currency will be an approximately 7% headwind to year-over-year total revenue growth in the fourth quarter based on current exchange rates.”

This would mean the third straight quarter of revenue decline for Meta Platforms. The company however expects to return to growth next year. Nonetheless, Wall Street wasn’t too impressed with Meta Platforms’ earnings as analysts question the costly metaverse investments at a time when the core ad business faces multiple headwinds.

Metaverse investments

In the third quarter, Reality Labs, which is Meta Platforms’ metaverse business, lost $3.67 billion as compared to $2.63 billion in the corresponding quarter last year. The business lost almost $10 billion in the first nine months of the year. Also, the segment’s revenues nearly halved in the third quarter.

Ahead of Meta Platforms’ Q3 2022 earnings, Altimeter Capital Chair and CEO Brad Gerstner wrote an open letter to Meta Platforms board and its Zuckerburg advising them to limit the investment toward building the metaverse to below $5 billion annually. He also called upon the company to reduce its workforce.

Zuckerburg announced layoffs

Zuckerburg defended the company’s metaverse investments during the Q3 2022 earnings. However, last month he announced mass layoffs. While he did not talk about lowering the metaverse investments, he said, “We’ve cut costs across our business, including scaling back budgets, reducing perks, and shrinking our real estate footprint. We’re restructuring teams to increase our efficiency.”

While JPMorgan is bullish on Meta Platforms stock for 2023, the company faces a new challenge from the Media bill in the US. If the bill gets passed, Meta Platforms might need to pay news publishers for hosting news on its platforms. The company is however in no mood to relent and has threatened that it would remove news from its platform altogether.

Other countries like Canada and New Zealand are also contemplating similar bills in order to support news publishers from the alleged monopoly of Big Tech companies.