JPMorgan downgrades Facebook parent Meta for the first time ever and removes it from its top-ideas list after earnings disaster

• JPMorgan downgraded Facebook parent Meta Platforms for the first time ever on Thursday.
• The bank cut Meta stock to "Neutral," lowered its price target, and removed it from its top ideas list.
• "Facebook is seeing a significant slowdown in advertising growth while embarking on an expensive, uncertain, multi-year transition to the Metaverse," JPMorgan said.
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JPMorgan is downgrading Facebook parent Meta Platforms for the first time ever after the social media company offered lower-than-expected guidance in its fourth-quarter earnings report on Wednesday.

Shares of Meta fell as much as 27%, erasing more than $200 billion in market value, and a slew of price target decreases from Wall Street followed. But most analysts reiterated their "Buy" or "Overweight" rating on Meta, except for JPMorgan analyst Doug Anmuth.

He downgraded the company to "Neutral" from "Overweight," and lowered its year-end 2022 price target to $284 from $385. Additionally, Meta was removed from JPMorgan's Analyst Focus List, essentially its "top ideas."

"Facebook is seeing a significant slowdown in advertising growth while embarking on an expensive, uncertain, multi-year transition to the Metaverse," Anmuth summarized.

Much of that advertising slowdown stems from Apple's IDFA privacy update to iOS last year, which requires users to opt-in to ad tracking by certain apps, rather than opting-out.

Meta CFO David Wehner said the company sees a $10 billion revenue hit in 2022 due to Apple's privacy change, and COO Sheryl Sandberg expects the headwinds to "moderately increase" throughout 2022.

"We believe management's tone around iOS impact has deteriorated, and what was once described as 'manageable' now appears to be a $10 billion revenue headwind in 2022," Anmuth said.

Adding to the Meta's future uncertainty is its pivot to short-form video via its Reels product in Instagram as it seeks to compete against TikTok.

But based on Meta's prior rollout of Stories in 2017 and 2018 to take on then-emerging rival Snapchat, strong engagement from Reels could initially put pressure on monetization efforts, according to the note.

"Theories abound as to why Facebook called out TikTok competitive dynamics several times on the call while hardly acknowledging it publicly as a competitor over the past few years," Anmuth observed. "We believe it will take time for ad load to ramp and for advertisers to get on board [with Reels], with some monetization progress in the second half of 2022, and more in 2023."

Not helping investor confidence with Meta's pivot to the metaverse and Reels is its first ever quarter-over-quarter decline in Facebook daily active users, "even if just by one million," he said.

With Thursday's sharp decline in the stock, Meta is undergoing a re-rating that now makes it cheaper than the S&P 500 index, based on its forward price-to-earnings ratio of about 18x. The S&P 500 currently has a forward P/E ratio of about 19x.