Meta's short video Reels may finally be ready to challenge TikTok, analysts say

Published Thu, Feb 2 20233:10 PM EST

Improving Reels engagement is boosting analysts' confidence in the short-form video platform's ability to compete with TikTok. Meta Platforms said Wednesday during a fourth-quarter earnings call that it expects Reels, a short-form video service available through Instagram, and once an albatross on the wider company, to become revenue neutral by the end of the year or in early 2024. Meta also said that monetization efficiency on Facebook doubled in the last six months. Video plays on platforms like Facebook and Instagram, meanwhile, more than doubled within the last year, as did re-sharing on both apps within just the last six months. A newfound emphasis on operational efficiency dominated Meta's conference call with analysts, a stark contrast to the growth at all costs mentality that once defined the social media platform founded by Mark Zuckerberg. Coupled with revenue that topped analyst estimates, investors drove up the stock by as much as 29% at one point Thursday , soothing concerns tied to Facebook's metaverse venture. In late trading, Facebook was still on track to post its biggest one-day gain since 2013 . META 1D mountain Meta Platforms shares surged more than 28% Thursday, on pace for their best day since 2013. Looking ahead, some analysts believe that Reels plays a dominant role in improving Facebook's efficiency. "Improving Reels monetization and easier comps should support accelerating revenue growth throughout the year," said Canaccord Genuity's Maria Ripps. Easing TikTok tensions As for TikTok, some analysts say Reels is in position to overtake the short-form video leader that finds itself under increasing pressure as calls for a nationwide bans grow. Late last year, Congress banned the use of the platform on government devices amid concerns over the Chinese-owned company's ability to gain access to data and protect privacy. Improvement in Reels engagement signal that Meta is successfully fighting back against TikTok and should "shut the 'No one uses Facebook Anymore' bear case up'" said Bernstein's Mark Shmulik in a note to clients Thursday. JPMorgan analyst Doug Anmuth views improving Reels engagement trends and artificial intelligence investments as a way to temper threats from TikTok. Mizuho's James Lee highlighted the potential for heightened scrutiny of TikTok in a Republican-controlled House of Representatives. "With limited revenue downside, more room for cost efficiency, and increasing scrutiny of TikTok, we continue to like the FY23 setup," Lee said in a Wednesday note. Not all analysts are convinced of the opportunity for market share gains against Reels. Atlantic Equities' James Cordwell said "growth will be capped by share losses to TikTok, with macro pressures remaining a risk to our forecast." Overlooking a costly metaverse bet Meta's bet on the metaverse through Reality Labs cost $13.7 billion in 2022, and it's expected to funnel even more money into the project in 2023. But at least some analysts and investors are willing to overlook the investment in Reality Labs. "We believe investor tolerance for investment in less-well-defined Reality Labs opportunities increases as performance at Family of Apps initiatives improve," said Guggenheim's Michael Morris. Rosenblatt's Barton Crockett said sudden, or "hockey stick growth" of the metaverse business' future losses appear unlikely, and he upgraded his investment opinion to a buy rating Thursday. "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," said Stifel's Mark Kelley. — CNBC's Michael Bloom contributed reporting