Morgan Stanley analyst Brian Nowak reiterated an Overweight rating on Meta Platforms, Inc
The analyst sees continued top and bottom-line upward revisions driving upside and multiple expansions from current trading levels.
The extent to which META can grow its ad revenue even faster (through core and Reels) could lead to even more upside and ~$20 of EPS. This faster growth could bring ~40% upside into play.
META's periodic Reels revenue disclosure helps him estimate that Reels global ARPU is still only ~28% the rate of other average META engagement, implying revenue opportunity yet to come (through higher ad load, performance-driven pricing, and improved matching/attribution). The fact that Reels's engagement is driving incremental time spent on the platform gives more confidence in Reels's ability to drive META's ad revenue.
Like Reels, META's periodic click-to-message ("C2M") disclosure helps Nowak estimate that C2M will make up ~$12 billion (9%) of total META FY23 ad revenue (rising 36% Y/Y).
He expects C2M to continue to grow at outsized rates, with META investing in onsite objectives like lead gen and products to enable businesses to optimize for down-funnel conversions in messaging apps.
In the long term, the analyst also sees the potential launch of AI-powered agents in WhatsApp, Messenger, and Instagram, which could further increase these applications' search and shopping capabilities.
In an ad world increasingly focused on more directly linking ad dollars to transactions, Nowak thinks C2M ROI-based ad spend will expand ad budgets.
META is improving its organic and paid content recommendation engines, building more robust ad ranking technologies, and developing further methods to improve ad targeting, measurement, and effectiveness.
The extent to which these improvements (and still strong engagement growth) drive more durable core revenue growth could lead to an upside from Nowak's conservative assumption that META's "core" ad business.
The fact that total U.S. time spent on overall META is growing 6% Y/Y speaks to potential engagement-driven upside here.
Similarly, higher monetization of Reels is a further source of FY24 upside. These analyses show the path toward 20% FY24 ad revenue growth and ~$20 of EPS.
Nowak's base case assumes ~13% FY24 ad revenue growth, with Reels driving 78% of growth, translating into $18.50 of EPS.
Price Action: META shares are trading lower by 0.06% at $299 on the last check Thursday.
