Recent earnings in the technology sector have given us some surprises, but the general theme of a difficult operating environment has been a constant. However, among social media stocks, while FB lagged due to weaker-than-expected fourth-quarter results, Snap (BREAK) and Pinterest (PINS) bucked this trend.
Meanwhile, tech giant Alphabet (GOOGL) delivered fourth-quarter numbers that beat Street’s expectations and sent the stock soaring.
In this scenario, let’s compare two stocks that are always in the spotlight on Wall Street, Meta Platforms and Alphabet, using the stock comparison tool TipRanks, and see what Wall Street analysts are saying about these stocks.
Shares of Meta have been battered over the past five days as the stock fell 21.2%. This share price drop was further fueled by the company’s recent fourth-quarter results, which saw earnings fall 5% year-on-year to $3.67 per share, while net income fell. 8% year-over-year to $10.3 billion.
But what caught investors’ attention was the social media company’s management’s admission that it was facing significant headwinds. This included growing competition from other social media platforms like Tik Tok. Additional headwinds in the period ahead include Apple’s ad targeting and measurement issues (AAPL) iOS changes (expected to impact business by $10 billion in 2022), regulatory changes, macro challenges such as cost inflation and supply chain disruptions, and currency impact foreign.
Apple’s iOS changes restricted the ability of social media companies like FB to serve personalized ads to its users, as Apple restricted app developers’ ability to track Apple ID for advertisers (IDFA) of a user. It did this by allowing users to opt out of sharing privacy information when downloading an app from AAPL’s App Store.
Wells Fargo analyst Brian Fitzgerald acknowledged the company faces such a difficult operating environment for the first time since its IPO. However, he believes FB will be able to overcome these challenges and anticipates a “multi-quarter road to recovery.”
Let’s see why the analyst thinks FB will be able to overcome these challenges. The first key positive emerging for Meta is Reels, which is also a key investment priority for the company this year.
Company management said on its fourth-quarter earnings call that Reels, its user-generated short video segment, is proving “to be a growing part of how people consume content in the future. “. The company also stated that “Reels is by far our fastest growing content format. It’s already the biggest contributor to engagement growth on Instagram and it’s growing really fast on Facebook as well.
FB is looking to simplify video on Instagram and create more creative and monetization tools for content creators. Currently, the content monetization rate at Reels is lower than Instagram’s or Facebook’s feed and stories, but the company expects this to improve over time.
Fitzgerald noted another key bright spot for the stock — its Reality Labs business segment. Along with changing Facebook’s name to Meta Platforms, the company’s growing focus on virtual and augmented reality apparel and products appears to be paying off.
In the fourth quarter, Reality Labs saw revenue jump 22% year-over-year to $877 million. Analyst Fitzgerald also noted that FB’s Quest store content sales exceeded $1 billion and that the Quest app was the top app when it came to app store rankings in the United States on the day of Christmas. The analyst pointed out that this shows growing consumer interest in virtual reality and the metaverse.
Additionally, the analyst said FB could benefit from regulatory intervention, as there is a bill in the works in the United States and the European Union (EU) that “would allow app developers to reach consumers via sideload or alt [alternative] app stores, possibly mitigating the iOS risk.
Sideloading allows consumers to download apps bypassing the official app store, if such an app is not available through official channels.
As a result, the analyst reiterated a buy rating on the stock but lowered the price target from $425 to $350 (up 47.6%) on the stock.
The rest of analysts, however, are cautiously bullish on the stock, with a moderate buy consensus rating based on 31 buys, 10 holds and 1 sell. The average Meta stock forecast of $330.35 implies an upside potential of around 39.3% from current levels for this stock.
The tech giant’s strong fourth-quarter results reflect broad-based strength in advertiser spending, as well as elevated consumer activity online. Fourth-quarter revenue climbed 32% year-over-year to $75 billion.
Advertising is a significant component of the company’s revenue, accounting for 81.2% of the company’s total revenue in the fourth quarter. GOOGL’s ad revenue jumped 32.5% year-on-year to $61.2 billion in the fourth quarter.
At the same time, Alphabet’s cloud business is also growing rapidly, as the company has made huge investments in developing the cloud computing division. The move made Alphabet more competitive in the market and diversified its revenue streams beyond its digital advertising business.
This was evident in the fourth quarter, as Google Cloud’s revenue jumped 44.6% year-over-year to $5.54 billion.
For the purposes of this article, we will focus more on GOOGL advertising revenue. The company is seeing growing momentum with YouTube, as indicated by YouTube ad revenue, which jumped 26% year-over-year to $8.6 billion.
This ad revenue growth for YouTube has increasingly been driven by direct response and brand advertising.
Additionally, company management said on its fourth quarter earnings call that YouTube Shorts (user-generated short-form videos) is seeing significant user engagement and has “achieved five trillion all-time views and counting.” fifteen billion views every day worldwide. Last year, the number of YouTube channels that generated at least $10,000 in revenue increased by more than 40% year over year. »
Jeffries analyst Brent Thill was positive about the overall strength of GOOGL’s search business and “the growing contribution from mobile, YouTube and international expansion.” But the analyst pointed out that Apple’s iOS changes could have had a “lingering impact” on YouTube’s fourth-quarter ad revenue, according to its audits.
The analyst remained bullish on GOOGL with a buy rating and raised the price target from $3,500 to $3,600 (up 25.6%) on the stock.
The rest of the analysts echo Thill and are equally bullish on GOOGL, with a Strong Buy consensus rating based on a unanimous number of 31 Buys. The average GOOGL stock forecast of $3,498.71 implies an upside potential of around 22.1% from current levels for this stock.
For FB and GOOGL, which derive the majority of their revenue from advertising, it is becoming apparent that user-generated content becomes the key to increasing that revenue.
While analysts are cautiously bullish on FB, they are bullish on GOOGL as it appears that GOOGL is successfully diversifying from its ad business to its cloud business.
Nonetheless, based on the upside potential over the next 12 months, Meta appears to be a better buy.
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