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The Ratings Game: Meta stock downgraded at Bank of America amid concerns about Reels and the metaverse

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Shares of Meta Platforms Inc. were falling in premarket action Monday after a Bank of America analyst threw in the towel on his bullish call.

Bank of America’s Justin Post downgraded shares of the Facebook parent company to neutral from buy, writing that he has a “more cautious” stance on Meta’s
META,
-1.16%

efforts to get people to watch more short-form Reels content on the Facebook and Instagram platforms.

“So far, Reels content does not appear to be materially incremental for total time spent on Instagram (IG) and Facebook (FB) and, like Snap, social content time in stories and feed could be down high-single digits,” Post wrote. “The shift in usage on FB/IG is a potential negative for gross margins and long term-competition.”

Reels are Meta’s version of what TikTok shows its viewers, but they currently don’t bring the same level of monetization for Meta as more established content types.

Meta shares are off about 1% in premarket trading.

Post sees “added risk of more negative sentiment into 2023 on cautious ad checks,” and he notes that Meta “could be less likely to keep up with peers on eventual market recovery on business model shifts (Reels and Metaverse).”

The company changed its name to Meta a year ago as it made a larger bet on opportunities in the metaverse, or virtual worlds where people can connect. But the company’s growing emphasis on the metaverse has been controversial given the time it could take for Meta’s lofty efforts to manifest into real results.

Meta shares have stumbled this year, falling 61% as the S&P 500 has lost 21%.

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Post holds the view that “Metaverse investment will remain a stock overhang” for the company. Additionally, he wrote that Wall Street “is less likely to back out Metaverse spend from EPS [earnings per share] for valuation purposes given lack of apparent progress with (or reported metrics on) users, potential new Apple competition, and a higher cost-of-capital mindset.”

Meta is due to report third-quarter results Wednesday afternoon, and while Post expects the company could deliver an in-line performance, he sees the potential for “uncertainty” when it comes to Meta’s outlook. A Bloomberg News report indicated recently that Chief Executive Mark Zuckerberg shared internally his expectation that Meta could become a “somewhat smaller” organization by the end of next year.

“While comments were likely geared toward addressing ongoing headcount reductions, we think commentary suggests a potentially cautious outlook on forward revenues,” he wrote.

He cut his price objective on Meta’s stock to $150 from $196.

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