Meta Platforms Faces Analyst Target Cuts Amid Tariff Concerns
For investors in Meta Platforms (NASDAQ: META), part of the Magnificent Seven stocks, recent analyst updates have raised concerns. Since early April, many analysts have lowered their price targets for Meta, with an average decline of 14% reported by MarketBeat. These adjustments stem from worries about the impact of new tariff policies on business operations.
Despite these reductions, the outlook is not entirely bleak. Analysts continue to assign a Buy or Overweight rating to the stock. The latest average price targets, even with the cuts, indicate a potential upside of over 23% when compared to the closing price on April 14.
Understanding the Effects of Tariffs on Meta
It’s crucial to recognize that tariffs have a limited direct effect on Meta. Most of the company’s revenue comes from advertising, a service not subject to tariffs. However, the company’s virtual reality (VR) hardware may see profit margins pressured due to increased costs from international sales and imports.
Even though the VR segment is currently unprofitable and not the primary revenue driver, any cost increases related to Meta’s data center expansion due to tariffs could create further headaches for the company.
The more significant threat to Meta’s business arises indirectly. Increased tariffs elevate operational costs for many companies, squeezing budgets across various departments, including advertising. Companies might find themselves needing to cut advertising expenditures, which would negatively impact Meta’s revenue. This trend is particularly apparent in two noteworthy cases.
Impact of Tariffs on Chinese Advertisers: Temu and Shein
Meta derives a considerable portion of its advertising revenue from platforms like Temu and Shein, which provide low-cost goods from China. A recent policy change has eliminated the de minimis exemption, prompting these companies to face substantial tariffs—up to 120%—on goods previously imported under the exemption, effective May 2.
This increase in costs is likely to impact the financial health of Temu and Shein, leading to reduced advertising budgets. Analysts at Bank of America estimate that these two platforms contribute 2% to 4% of Meta’s total ad revenue. The same exposure applies to Alphabet (NASDAQ: GOOG), the parent company of Google. Furthermore, in 2024, 11% of Meta’s Family of Apps revenue derived from Chinese companies.
In summary, the ramifications of significant tariffs on Chinese firms could further compound the challenges facing Meta. Additionally, broader economic uncertainty in the U.S. and around the globe may lead to decreased ad spending.
Why Meta May Outperform Competitors
Despite these challenges, there are reasons to believe Meta could outperform its competitors in advertising during a downturn. Thomas Champion of Piper Sandler highlighted that advertisers are likely to preserve spending on platforms like Google Search and Meta amidst budget cuts. Companies recognize the value of advertising on Meta’s apps, creating some protection against cuts.
Data from eMarketer reveals that time spent by users on Meta’s apps closely mirrors that on YouTube, with both accounting for about 7.5% of adults’ time on digital platforms in the U.S. Nevertheless, Meta commands a dominant share, capturing a remarkable 21.3% of total ad spending—3.8 times more than YouTube’s 5.6% share.
This disparity illustrates how marketers perceive Meta as a more effective platform for ad spending, despite comparable user engagement metrics. The emphasis Meta places on ad personalization through artificial intelligence likely enhances this perception, promising more stability in ad revenue compared to competitors during tougher economic periods.
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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
