This year has been very challenging for Meta Platforms’ (META) investors. Meta’s second-quarter results added to investors’ woes, as the company reported its first-ever revenue decline since it went public. Furthermore, its Q3 guidance reflects continued pressure and a second consecutive quarter of declining sales. While short-term headwinds may continue to impact Meta, Wall Street remains optimistic about the long-term potential.
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Meta Platforms Stock is Facing Multiple Headwinds
Meta is facing multiple headwinds. Its Q2 revenue declined nearly 1% year-over-year to $28.8 billion. This was due to lower online ad spending amid a tough macro backdrop and currency headwinds. Also, Apple’s (AAPL) iOS privacy policy changes are hurting Meta’s ad business by limiting its ability to effectively track users.
Meta’s Q2 earnings per share fell 32% to $2.46, with the operating margin down significantly to 29% from 42.5% in the prior-year quarter. The Q2 profitability was impacted by significant investments made in its Reality Labs division.
The Reality Labs segment focuses on the company’s Metaverse vision and develops augmented and virtual reality hardware, software, and content. The division’s revenue increased 48% to $452 million in Q2. However, it generated an operating loss of $2.81 billion, up from $2.43 billion in the prior-year quarter. Clearly, the company’s long-term growth plans for Metaverse are impacting its near-term profitability.
Meanwhile, Meta is also under pressure due to intense competition from TikTok. Instagram Reels, which is Meta’s answer to TikTok, is gaining traction. The company disclosed that it has now crossed $1 billion in annual revenue run rate for Reels ads. That said, Reels currently monetizes at a lower rate than Instagram Feed or Stories.
Is Meta Stock Still a Good Buy?
Overall, the Street is cautiously optimistic about Meta Platforms, with a Moderate Buy consensus rating based on 28 Buys, five Holds, and two Sells. The average META price target of $227.03 suggests 29.84% upside potential from current levels. Shares have plunged 48% year-to-date.
RBC Capital analyst Brad Erickson noted that Meta’s Q2 results were “roughly in-line” with his checks, but the company’s third-quarter outlook missed the sell-side consensus by 10%.
Erickson stated, “Value seekers may be tempted with likely acceleration beyond Q3, but ex-macro, Reels must ramp monetization & stem Tiktok share loss, targeting must improve, and investors must find religion on metaverse investments before the stock breaks out of its current valuation range.”
In line with his investment thesis, Erickson lowered his price target for META stock to $190 from $200 but maintained a Buy rating.
Conclusion: Analysts are Optimistic about Meta Stock’s Long-Term Prospects
The reach of the suite of products that Meta owns – Facebook, Instagram, Messenger, and WhatsApp – can’t be ignored. Family Daily Active People (DAP), which indicates the number of users who visited at least one of these products in a day, was 2.88 billion on average for June 2022. However, near-term pressures due to softened ad spending, Apple’s iOS privacy changes, and intense competition from TikTok can’t be ignored. That said, most analysts continue to be bullish on the company’s long-term potential.
