As expected to some extent, Threads did not maintain the initial momentum upon its release. And that, oddly enough, is good news for Meta Platforms (META.US) shareholders. Since social media company has other assets that the management team should work on instead of focusing all efforts on the Twitter-like app.
Looking at the chart quickly, of the 51 analysts offering 12-month price assessments for Meta Platforms Inc have a median target of $310.00, with an estimate of $400.00 and a bearish estimate of $100.00. The median represents a decrease of -0.20% from the last price of $310.61
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source: xStation
The launch of Threads has been the last catalyst that in a few days boosted the price of Meta by +8%, which is already starting to lose. The consensus of analysts still projects higher rises where its main resistance is in the area of $350 per share.
Ad Optimization
Let's start at the beginning, Meta has made good progress in improving ad efficiency in the last few months. According to Mark Zuckerberg, the AI tools increased Reels monetization efficiency by 30% on Instagram and 40% on Facebook compared to the prior quarter. Efficiency improvements are likely to continue to be made over time as Meta gains more experience implementing AI-based tools.
It's worth noting that improvements in the quality of content recommended to users may lead those users to spend more time on the platform, increasing ad impacts without significantly degrading the user experience. According to Meta's first quarter earnings release:
“In Q1 2023, delivered ad impressions across our family of apps increased 26% year-over-year and average price per ad decreased 17% year-over-year.”
The decline in the average price per ad is a bit of a concern, however it could simply be due to a difficult macroeconomic environment and a corresponding decline in demand for ad space. As economic strength and small business confidence begin to improve, it could lead to increased demand for ad space. Investors would do well to keep an eye on this metric (average price per ad) going forward, as a continued decline in this metric could be a sign that Meta is underperforming.
Efficiency improvements are crucial for Meta to remain competitive in the ad space. In addition to improving your competitive positioning, efficiency improvements can also increase the margins of your advertising business.
Data ecosystem
Meta has many different revenue segments and they typically work together to form a strong data ecosystem. Most of the platforms that Meta runs provide an avenue for users to generate data through what they post and interact with. Meta stores and analyzes this data to improve the quality of its ad delivery.
As the value of data increases, Meta may find new ways to monetize its “treasury” of data that go beyond optimizing ad delivery. As time passes and company employees begin to change the way they think about data, creative uses for it are likely to emerge. As long as the company fosters a culture of innovation, it should be able to navigate the changing technology climate and take advantage of future opportunities related to this segment.
Price Action YTD
source: seekingalpha
Somewhat surprising is the fact that Meta has underperformed both the Nasdaq 100 and the S&P 500 over the past five years. The company has been rocked by more than a few controversies during that time period, and now may be the time for the company to return to long-term outperformance. Although its behavior since the lows of 2022, far exceeds the behavior of the other benchmarks.
source: seekingalpha
Valuation
Meta seems a bit expensive relative to its recent history, but this does not take into account the difficult economic environment and the opportunities that the company will have in the future. While Meta has a business that relies heavily on advertising, it is taking proactive steps to not only remain competitive in advertising, but also to monetize its data in new ways. The company has a strong balance sheet and is not capital intensive.
For these reasons, it is possible that the stock is still a good value despite recent gains. The company has a massive user base and plenty of opportunities for future growth. Given the current circumstances, a Meta valuation above a 12-month 30 PE would create strong selling pressure, but until then the company appears reasonably valued with the potential to beat expectations. Even though at 5 years it stands at 15.5x times.
source: seekingalpha
Risks
Regulatory risks are top of mind for investors in Meta. Regulators around the world have shown contempt for the company and its data collection practices. It is true that over time, Meta will begin to rely less on user activity that occurs outside of the platform and will instead use only user-generated data and interactions within the Meta ecosystem, thereby reducing the privacy concerns.
Another risk is that the Meta user base starts to shrink. While this is always a possibility, at the moment your user metrics appear to be stable. As the company gets better at monetizing its user base, it could even afford to have a decrease in users without significantly impacting its operations.
The risk/reward ratio is still favourable, but the company will need to do a good job of navigating the regulatory landscape to ensure its business can be successful in the long term.
The “Twitter Killer”: Threads
Traffic jam
Threads started with 100 million app downloads in just 5 days, since its launch on July 5th. The application was the fastest in history to reach such a mark, even surpassing the successful ChatGPT.
Source: Visual Capitalist
The problem Threads faces is that an app like this needs to be ready to go in prime time or new users will quickly leave the platform. The threads posted at its launch were very basic, and as a result, new users were left following random posts based on an algorithm, not their own interests. So there is still a lot to improve.
From the beginning, the head of Instagram, Adam Mosseri, made it clear that the new social platform would not focus on hot topics like news and politics. He made the following statement highlighting Threads' barren appearance and probable demise as follows:
"Inevitably, big news and politics will show up on Threads (they've done so on Instagram to some degree as well), but we're not going to do anything to encourage those verticals."
The problem is that the news is filtering into the sports, music and fashion categories where Threads wants to focus, but which don't correspond to what the user is looking for.
Just as Meta CEO Mark Zuckerberg was gloating about his victory with Threads crossing 100 million registrations last weekend, traffic on the platform was already collapsing.
Source: Threads
Several sources of website traffic are now reporting a significant drop in usage days after the app was released. Similarweb reported that Android DAUs (daily active users) dropped 20% on July 10, and more importantly, engagement dropped to just 8 minutes per day on July 10 after reaching a much higher peak. on July 6 with more than 20 minutes.
Source: PC Mag
Sensor Tower offered similar numbers to CNBC with share already down by more than 50%. Even Google trends show that searches for Threads peaked on July 6 (a day later) and completely collapsed to less than 25% of the peak 100 million users.
Source: Google Trends
Not everything is bad
The good news is that the company can once again focus on the products of the future, like Reels and AR/VR headsets. The key to Reels is that the short video product is chasing a competitor in TikTok (BDNCE) with an estimated US revenue target of $9bn by 2023, while Twitter was just a $5bn global business. when Musk took the company private.
TikTok has the potential to be banned in the US, providing great incentive for Meta to come up with a solution to replace the social platform. So far, South Dakota has banned the app in the state, and several government organizations have taken similar steps.
While TikTok could be forced out of several countries due to the Chinese government connection, Twitter will remain a strong competitor. While Musk shook up the employee base by laying off a large chunk of the executives and employees, the platform seems to be stabilizing and building new monetization features alongside new content from the likes of Tucker Carlson after he was fired by Fox News.
In addition, the Metaverse has been a large investment (a large capital outlay, rather) and the executive must focus on developing a set of products that allows reducing what today are losses. Meta has the potential to lead in this category for future growth, while competing against Twitter could provide limited advantage.
Analysts estimated the following revenue targets based on the initial hype of up to 100 million downloads in the first 5 days:
- Evercore: $8 billion, 5% revenue increase
- Bank of America: $2-3 billion,
- Wells Fargo: 1% to 3% increase
- KeyBanc: $0.9 - $6.7 billion, 1% to 5% increase
While Threads may reverse the current user rejection, the upside potential still seems limited. The average increase in analyst revenue is a few percentage points from the target revenue base to exceed $140 billion by 2024.
The social media giant has had so many failed product attempts that it does almost no damage to the Meta brand anymore in the event of failure. The biggest risk is that the company allows the product to become a major distraction to other key products.
Again, Meta has multiple opportunities with revenue streams of over $10 billion, making the focus on a competitor app to Twitter pointless. The company is selling dollars for nickels and it even looks like it won't have the ability to monetize Threads for a while.
Should Threads become an app that truly destroys Twitter completely without distracting the executive from Reels and the Metaverse, the investment thesis at Meta can only get better. The stock has actually risen to $310 on the expectation of Threads, something that could be considered very little.
The recent move cuts short-term upside, but Meta has still normalized 2025 EPS of $20 by paring massive losses in Reality Labs. The stock has more upside, but it looks like we'll have to wait for a dip as the price fades. Threads moment and the recent high of $20 per share disappears.
Conclusion
The key takeaway from investors is that Threads looks like a major distraction for Meta Platforms. The collapsing traffic trend is positive for business as the company refocuses on the other businesses of full short-form video creation (Reels) and the Metaverse.
The stock is cheap (although it has appreciated 285% from 2022 lows) and is trading at just 15.5x adjusted EPS targets for 2025, but investors can likely buy Meta at a better price in the coming weeks when disappointing traffic trends for Threads match recent enthusiasm and tech sector results confirm the decline expected by market consensus.
Meta will present its results on July 26 at the close of the Wall Street bell.
Dario Garcia, EFA
XTB Spain
