JPMorgan upgrades Meta to buy, saying top and bottom-line pressures will ease in 2023

Published Fri, Dec 16 20226:09 AM EST

Now is the time to snap up shares of Meta at a discount, according to analysts at JPMorgan. The firm upgraded shares of the social media company to overweight from neutral and boosted its price target to $150 from $115 in a Dec. 16 note. That implies a nearly 30% upside from Thursday's close. "Meta has been impacted by Apple privacy changes, TikTok competition, Reels headwinds, heavy hiring & expense growth, an uncertain build-out of the metaverse, and macro pressures," wrote analyst Doug Anmuth, adding that Meta has shed 65% this year, much worse than the broader market. "However, heading into 2023, we believe some of these top and bottom-line pressures will ease, and most importantly, Meta is showing encouraging signs of increasing cost discipline, we believe with more to come," he said. Why Meta is set to gain Meta is trimming its headcount by 11,000 employees after adding 19,000 in the last four quarters – a step in the right direction for reducing cost, according to the note. The company may be leaving room to resume hiring in the first quarter, but JPMorgan still expects its $94 billion - $100 billion expense outlook to move lower as the budget is finalized through the year. This translates to better earnings per share for investors. "We're encouraged by Meta's early commitment to build financial discipline across the company under new CEO Susan Li," Anmuth said. There's also signs that some advertisers are bringing spend back to Meta. While JPMorgan doesn't see a material improvement in 2023, but the changes from Apple that hurt ad spend will be less of a headwind. Competition against TikTok is heating up, but Meta should be able to keep its user engagement relatively steady. "Heading into 2023, Meta should be comping peak TikTok impact early in the year, and we believe overall Meta engagement remains solid, with time spent per user stabilizing," said Anmuth. In addition, the U.S. government recently banned TikTok use on government devices, as have number of states. "While a full TikTok ban still seems unlikely, the possibility is increasing & Meta would be a primary beneficiary," Anmuth wrote. Reels, Meta's TikTok competitor, should be revenue neutral next year, according to JPMorgan. This means that next year it could serve as a monetization engine. Of course, JPMorgan still sees major losses ahead for Meta's reality labs division. "Reality Labs losses increasingly weigh on Meta's GAAP earnings & we project RL losses doubling from $6.6B in 2020 to $13.7B in 2022," Anmuth wrote. "Looking ahead, management expects RL losses to grow significantly in 2023 & then it plans to pace investments in the outer years." JPMorgan projects reality labs losses reaching $17 billion in 2023 and $19 billion in 2024. Reality labs "is critical to the long-term future of the company so we do not strip out those losses, but we do think Meta management will moderate the pace of investments based on adoption & success rates along the way," Anmuth said.