Meta Faces Rising Risk Of Free-Cash-Flow Burn As Creator Payouts Evolve, Says Analyst

BMO Capital analyst Brian Pitz reiterated a Market Perform rating on the shares of Meta Platforms Inc META with a price target of $450.

Content creators obtain traffic from 12 sources, including social (Instagram remaining the biggest portion), and just half of the +200 million creators globally are monetizing their content.

Hence, the analyst deems Meta and other social platforms will need to increase their creator payout to ensure that engaging content remains on the platform.

If Meta chooses to pay creators similar to the nominal dollars that they receive on YouTube for longer-form content, it could increase cost of revenue by $3-5 billion annually, noted the analyst.

Since Creators are increasingly seeking alternative income streams as Instagram already drives a massive $15 billion of off-platform brand deals, the analyst noted this setup increases the risk that Meta will need to offer rev share prior to the program generating positive FCF, or risk losing creators to other platforms including YouTube, Snap, Twitch, and increasingly Linktree.

AI competition heats up with uncertain return on investment on Meta as TikTok leads in short-form discoverability and YouTube with long-form, opined the analyst.

Also Read: Meta To Use European Social Media Data For AI Training: Report

While Instagram is closing the gap with TikTok on ranking/recommendation, risks remain that engagement plateaus/declines given TikTok's leadership position, said the analyst.

Meta said revenue derived from China advertisers totaled $13.7 billion in 2023, an increase of 85% Y/Y, majority of which the analyst thinks is coming from Temu and Shein, particularly lower-funnel sign-up and app install ads.

Further, app downloads for Temu increased just 35% in May which is a noticeable decline from April and March of 162% and 196%, respectively, noted the analyst.

Mobile app daily active users appear to have peaked in 4Q23, while time spent per day is also moderating. According to the analyst,  3Q24 consensus growth expectations are about 15% (BMO is +11%) which could prove challenging particularly as comps get 12% more difficult in 3Q versus 2Q24.

Price Action: META shares are trading higher by 0.16% at $508.26 at the last check Wednesday.

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