Bank of America downgraded Facebook parent Meta (META) to neutral from buy on the likelihood that advertising spending pressure would increase next year and result in budget cuts, the bank said in a research report Monday.
Bank of America cut its price target on the stock to $150 from $196. Meta shares initially fell about 4% in early trading Monday before recovering to trade slightly lower at $129.42.
Bank of America also wrote that Meta’s huge investment in the metaverse is likely to remain an “overhang” on the stock, noting that analysts are unlikely to back out metaverse spend from earnings per share (EPS) for valuation purposes given the lack of progress with users, potential new competition from Apple and a “higher cost of capital mindset.”
It is expected that the European Digital Markets Act and numerous reviews of Section 230 liability protection will remain as “hard-to-quantify sentiment overhangs on the stock,” which may deter value-focused buyers, the report said.
Meta should address investor concerns about Instagram usage headwinds, spending on building the metaverse given the perceived lack of user traction, high capital expenditures that are impacting free cash flow (FCF), Reels content quality and margins and progress and a timeline for targeting improvements, the note added.
Meta reports its third-quarter results after the close on Wednesday, Oct. 26.
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