Analysts laud Meta Platforms' focus on efficiency, say the stock is transitioning from 'doghouse to pedestal'

Published Thu, Feb 2 20236:36 AM ESTUpdated Thu, Feb 2 202311:57 AM EST

Meta Platforms is turning its focus toward efficiency, and analysts seem to like the narrative shift from the battered technology giant. Shares surged more than 19% in Thursday premarket trading. On Wednesday, Meta surpassed fourth-quarter revenue estimates and announced a $40 billion share repurchase program, and CEO Mark Zuckerberg said the company is focused on efficiency. "Our community continues to grow and I'm pleased with the strong engagement across our apps," Zuckerberg said in a statement Wednesday. "Our management theme for 2023 is the 'Year of Efficiency' and we're focused on becoming a stronger and more nimble organization." JPMorgan's Doug Anmuth reiterated his overweight rating, saying in a note Thursday that a focus on cost cuts should improve earnings power and benefit the stock in the near and long term. "Importantly, we expect this recently-found discipline to drive a stronger and more nimble organization over the long-run, not just for the next 12 months," he wrote. META YTD mountain Meta Platforms shares have already surged 27% this year Analysts also seemed to praise the company's move to lower its outlook for capital expenditures and operating expenses. Jefferies analyst Brent Thill said in a note Wednesday that it should provide upside to earnings per share in 2023 and falls in line with the company's track record of guiding higher on both. "Usage, engagement and revenue are all growing, while costs and capex are coming down, a recipe for further upside," Barclays' Ross Sandler wrote in a note Wednesday to clients, noting that 2023 could be the year that the company transitions from "doghouse to pedestal." The results even warranted an upgrade to buy from Bank of America. Analyst Justin Post also hiked his price target on the stock to $220 from $160 . The new price target implies upside of 43.7% from Wednesday's close. "We see three drivers than could lead to ongoing multiple expansion for the stock: 1) With the new efficiency mentality, the stock is now positioned for leverage/EPS upside as the ad environment improves, 2) Competitive environment improving with Reels usage growing and TikTok daily active users decelerating, and 3) Data on call (20% ad conversion improvement) suggests Meta could become a play on multi-year [artificial intelligence/machine learning] improvement cycle following outsized capex/GPU investment in 22/23," Post said. Piper Sandler's Thomas Champion also upgraded the stock to overweight, noting that the lowered capital expenditures and operating expense guidance creates a reset for free cash flow expectations. He raised estimates for the first time since 2021 as the company focuses on efficiency. The word "efficiency" came up more than 25 times on the company's earnings call, according to Morgan Stanley's Brian Nowak. The shift in focus, he added, could pressure competitors such as Alphabet and Amazon to improve their durability. Meta shares are already up 27% year to date, and while the social media giant is "far from out of the macro woods," the cost reductions create the "EPS slingshot opportunity" investors have been waiting for, said Evercore ISI's Mark Mahaney. The analyst has an outperform rating on Meta and hiked his price target to $275, which implies upside of nearly 80%. Shifting views on the metaverse and Meta's 'Family of Apps' Analysts are also growing more confident in the company's Reels business and metaverse play. Goldman Sachs' Eric Sheridan reiterated his buy rating on Meta, saying that shares should continue their recovery as the company "builds a rising revenue narrative" around its so-called "Family of Apps." The company's audience across apps should position it well as consumer habits evolve within augmented reality, messaging, short-form video and more, he wrote. Morgan Stanley's Nowak lauded the company's continued progress in monetizing and improving engagement on its Reels product, with plays more than doubling on Facebook and Instagram within the last year, and even faster resharing growth. The overall advertising environment faces challenges, and the company continues grappling with headwinds from Apple's privacy changes. The industry does see some bright spots in the months ahead, though. "That said, advertiser adoption of new tools (such as CAPI) continues to grow, AI investments are improving measurement and targeting, and new formats such as click-to-message ads and Shop ads are moving conversions on-platform," wrote JMP's Andrew Boone. To the same tune, analysts expect losses for the company's Reality Labs division, which recorded another quarterly operating loss for the business, bringing its total for 2022 to $13.7 billion . Guggenheim's Michael Morris said in a note Wednesday that strength and increasing performance within Meta's "Family of Apps" is helping to improve investor tolerance for its metaverse play. Stifel's Mark Kelley said, "We don't think you have to be a believer in the metaverse story to like the stock — we think the increased transparency around Facebook Reality Labs is a positive, but we also don't think the initial goal of reaching 1 billion metaverse users is a stretch." — CNBC's Michael Bloom contributed reporting.