Meta loses its 'buy' rating from Morgan Stanley after blowing past spending forecasts and casting doubt on strong cash flow in 2023

Meta logo Arnd Wiegmann/Reuters

• Morgan Stanley downgraded Meta stock to equal-weight from overweight and slashed its price target to $105 from $205.
• Analysts cited Meta's forecast for capital spending, which will weigh on its cash flow. 
• "And in the meantime, we see earnings power staying depressed," the bank's note said. 

Morgan Stanley downgraded Meta stock Thursday, a day after Facebook's parent company reported a decline in revenue for the second straight quarter and offered capital-spending guidance that turned heads on Wall Street. 

Analysts cut their rating on the stock to equal-weight from overweight and slashed their price target to $105 from $205.

Morgan Stanley wrote in a note that while the bank doesn't like to make ratings changes in a reactionary fashion, "we think META's latest results and forward capex guidance are thesis changing and likely to weigh on the shares for some period...until the market can feel confident in execution and return on invested capital from these outsized investments."

In particular, analysts pointed to Meta's guidance for $69 billion in capital expenditures over two years, saying that indicates "structurally higher capital intensity." Even the low end of Meta's spending outlook for 2023 alone was $7 billion higher than expected, they added.

The massive spending wave is being driven by investments in artificial intelligence-driven data centers, as Meta scrambles to adapt to a new social-media landscapes that's now dominated by short-form video, according to the note.

Shares of Meta fell as much as 25% Thursday, and erased roughly $65 billion from the company's market capitalization. By midday, the stock was down 22%, trading at about $101.

Meta, formerly known as Facebook, pivoted away from a focus on its flagship social media site toward big spending on the metaverse to further delve into the Web3 space in 2021. 

But optimism from management surrounding the lack of layoffs and insistence on the future of Reality Labs, among other factors, was not adequate to offset disappointing guidance for next quarter and year ahead, according to a separate note Thursday from strategists at JPMorgan. 

Eventually, the upside from Meta's investments will show up in the company's quarterly reports, and there are early signs that Reels — Meta's answer to TikTok — is showing some improvement, Morgan Stanley said. But gains in revenue and engagement may not show significant advances until well into 2023.

"And in the meantime, we see earnings power staying depressed," the note said.