Atlantic Equities downgrades Meta on concerns of shrinking revenue growth, rising costs

Published Tue, Oct 11 20227:48 AM EDT

There could be trouble ahead for Facebook-parent Meta Platforms , according to Atlantic Equities. Analyst James Cordwell downgraded the tech giant to neutral and lowered his price target to $160 – which presents an upside of just under 20% — as online advertising competition heats up. Atlantic also cut its 2023 and 2024 earnings per share forecasts by about 13%. "We now believe Meta's growth outlook is increasingly challenged given strengthening macro headwinds, rising competition for advertising dollars and our analysis suggesting that secular tailwinds in digital advertising are set to ease," Cordwell said in a note to clients. Cordwell said Meta will see about 11% growth in digital advertising excluding ad-search compared to topping 20% in previous years. Meta is also poised to lose market share, in part due to the success of Alphabet 's Google Network's advertising offerings and the scale-ready monetization of ByteDance's TikTok. That marks a turn from growth in market share before the pandemic and holding steady during it. Cordwell said growth in Instagram Reels is a reason for optimism, but that does not outweigh competitive pressure in other areas. But Cordwell noted Meta could benefit if TikTok is not able to replicate its monetization success in the western part of the world. Meanwhile, Meta is struggling to limit costs that will weigh on the bottom line more substantially as revenue growth slows, Cordwell said. He pointed to Family of Apps and Reality Labs as two areas with cost-cutting opportunities. "Our revised $160 YE23 PT requires a 14x FY24 PE, a ~10% discount to the market," Cordwell said. "This discount is towards the upper end of the range since Meta's growth challenges started to become evident earlier in the year, and we no longer see a re-rating as likely given slowing secular tailwinds, likely ongoing market share losses and further margin pressure in the core Family of Apps segment." CEO Mark Zuckerberg has tied the future success of the company to the growth of a virtual reality platform called the metaverse. Last year, the company changed its name from Facebook, which is still the name of its original social media platform, to Meta to reflect the changing focus. The company announced plans this summer to slash hiring as it readies for a period of economic downturn. — CNBC's Michael Bloom contributed to this report.