Meta Platforms (NASDAQ:META) shares rose on Tuesday as investment firm RBC Capital Markets said the concerns over its Reels video product have reached a "fever pitch" and shares are still "attractive on a risk-reward basis.
Analyst Brad Erickson, who has an outperform rating and a $190 price target on Meta Platforms (META) shares, noted that more usage is being shifted towards Reels, which do not monetize as well as other types of content on Facebook and Instagram. And while this may be a concern, any improvement in ad-targeting would outweigh any negativity associated with Reels.
"While Reels' apparent building headwinds are absolutely concerning, we've remained positive on META as we leave the door open for near/medium-term ad targeting signal restoration as this would far outweigh the Reels headwinds and would likely re-rate the stock with '23 buy-side [earnings per share estimates] now at/below $10/share," Erickson wrote in a note to clients.
Meta Platforms (META) shares gained 1.5% to $138.68 in premarket trading.
In addition to worries over ad targeting and increased usage of Reels, Meta Platforms (META) has dealt with macro headwinds, elevated investments in the metaverse with "insufficient explanation" and a "myriad" of environmental, social and governance concerns.
But it seems as if Reels is the primary point of concern. Recent data points point to a "marginally negative picture" for Reels itself as well as other short form video platforms, compared to better monetizing features, such as News Feed and Stories, Erickson pointed out.
A leaked memo from Instagram's Chief Executive Adam Mosseri recently revealed that Reels has "bigger shortcomings" when compared to TikTok, owned by China's ByteDance (BDNCE), and Google's (GOOG) (GOOGL) YouTube Shorts.
There have also been some third-party data points that have indicated "marginal declines" in user time spent, as well as some anecdotal grumblings about disgruntled creators and brands on both Facebook and Instagram.
And while the Reels headwind continues to be sizable, with Erickson estimating that every 100 basis point of user shift mix resulting in a 46 basis point headwind to revenue, it's likely that any improvement could wash away this "low-single digit risk," perhaps as much as $1B in incremental revenue for every 100 to 150 basis point improvement in cost-per-action.
The analyst noted that recent ad agency checks did not find any improvements just yet, but an improvement in signal targeting would "more than dwarf" the headwinds from Reels and "completely flip the share loss narrative" Meta (META) has faced and likely drive a "meaningful" re-rating of the stock.