It's hard to believe that it's been nearly two decades since social media platform Facebook launched in a college dormitory. Those who grew up with Facebook saw it evolve from a website that allowed users to share information with friends into one of the largest technology conglomerates in modern history.
And just as its big-tech cohorts like Apple and Microsoft faced existential crises at some point in their existence, the social media giant is facing a crisis of its own, trying to rebuild its identity. After rebranding to Meta Platforms (META -1.48%) last year, the company announced that its new frontier and focus would be the highly anticipated, and speculative, virtual world(s) known as the metaverse.
After some initial excitement from investors, the market began to question this evolutionary move, calling it a gamble and a big distraction from the company's core operations. As a result, Meta stock is down 60% year to date and just hit a new 52-week low this past week.
From the outside, it would seem investors have more to fear from Meta stock than to be encouraged about. However, some recent Wall Street research suggests Meta is a compelling buy at its current valuation. Let's see what could push Meta higher in the near future.
Don't be distracted by the metaverse
Meta's second-quarter results may have initially left investors with sticker shock. In Q2 the company's research and development (R&D) expenses were up 43% year over year, while sales and marketing costs rose 10%. Meta's CFO, Dan Wehner, attributed the dramatic rise in costs to heavy investments in the Reality Labs segment -- Meta's gaming and virtual reality business. Reality Labs is the business that will bring its metaverse ambitions to life.
Meta faced major headwinds in its advertising business, which is its primary revenue driver. This is because Meta apps run on Apple's iOS platform (as well as other platforms), and Apple recently changed its privacy policies, which made it harder for companies like Meta to target ads to specific end users.
While its primary source of revenue slows down and its expenses ramp up, Meta certainly doesn't seem to be a good investment. But some on Wall Street are releasing info that suggests Meta is still a compelling business in the long run.
What is Wall Street saying?
One of the most interesting (yet overlooked) components of Meta's Q2 earnings call was the discussion around its short-form video products, dubbed Stories and Reels. While competitor TikTok seems to dominate the short-form video market, especially with the highly coveted Generation Z demographic, many analysts peppered Meta's leadership with questions on the monetization of these content products.
According to the earnings transcript, engagement with Reels is growing exponentially; as of Q2, Reels made up over 20% of the time that users spent on Facebook and Instagram. This is a positive signal because it shows that Meta is adapting to developments in the advertising space and finding new and creative ways to monetize its users. Meta CEO Mark Zuckerberg said: "[O]ur work on ads monetization efficiency for Reels is actually making faster progress than we'd expected. We've now crossed $1 billion annual revenue run rate for Reels ads, and Reels also has a higher revenue run rate than Stories did at identical times post launch."
Analyst Ronald Josey of Citigroup recently issued a note to investors citing positive data trends from Reels. According to Josey's internal estimates, ad loads on Reels reached 14% in September, almost double the 8% in July. This means that users on Reels are experiencing ads earlier than they were previously. In turn, as ads reach viewers more quickly, the potential reach of all advertisements broadens, thereby potentially leading to higher click-through rates and revenue conversion.
Another analyst, Jason Helfstein of Oppenheimer, recently noted that Apple is launching an updated version of its ad software. Essentially, the company will be adding back several features to its network that it earlier took away (and which kept Meta and other advertisers from engaging with users effectively).
Whether Josey's estimates are precise or not is secondary. If Reels engagement is not only growing, but growing quickly, that's a very positive indicator for Meta. Moreover, Helfstein's comments seem to support this thesis, given the upcoming updates to iOS.
Keep an eye on Q3 earnings later this month
Josey currently has a price target on Meta of $222, indicating a more than 60% upside from its current price. Although not as bullish, Helfstein still has a price target of $190, for an upside of over 40%.
While Meta had made it clear that it would invest billions into the metaverse, there are several reasons to believe that the company will be able to generate superior growth from advertising to fund these new initiatives.
Although Meta faced some headwinds in 2022, there does appear to be a light at the end of the tunnel. Third-quarter results will be released later this month. In the meantime, investors may want to listen to management's commentary about growth in short-form video, the pace at which it's monetizing, and the company's views on the upcoming potential tailwinds of iOS.