Meta sees downgrades amid a new reality of higher costs
KeyBanc downgraded shares of Meta (NASDAQ:META) Thursday citing a higher cost environment as the company transforms its business. Morgan Stanley also cut its rating on the stock.
KeyBanc analyst Justin Patterson cut the stock to Sector Weight from Overweight.
META is down 20% in premarket trading after disappointing earnings that included a revenue warning.
"We believe Meta is undergoing a business transformation in a challenging macro, privacy, and competitive environment," Patterson wrote in a note. "While we are encouraged by progress with short-form video, we believe data center and R&D investments are likely to lead to higher operating costs over the medium term, and thus prevent Meta from returning to 2019 margins."
His bull case is that "Meta returns to a 35% growth profile, and management takes steps to reduce the pace of expense growth, while his bear case assumes "EPS growth decelerates, reflecting materially worse margins from elevated investment and competition with TikTok and other short-form video platforms."
Morgan Stanley's Brian Nowak downgraded META to Equal Weight from Overweight, with the price target dropping $100 to $105 per share.
"We typically don’t like 'night-of' ratings changes as they can be reactionary," Nowak said. "But we think META’s latest results and forward capex guidance are thesis changing and likely to weigh on the shares for some period ... until the market can feel confident in execution and return on invested capital from these outsized investments."
Stepping back, the company's investments look to be "a signal of higher required structural capital intensity going forward as META adjusts to the post-IDFA social media landscape that is more driven by short-form video than social content/signal," he said. "Material revenue and engagement incrementality from these investments is likely to take time (well into ’23?) and is uncertain. And in the meantime, we see earnings power staying depressed."
Dig into what Mark Zuckerberg said on the earnings call.