Meta stock investors have been fretting of late over whether China-based e-commerce retailers will keep spending big on Facebook and Instagram ads. But at least one analyst thinks the advertising dollars can keep flowing.
Meta Platforms is likely to be a "disproportionate beneficiary" of continued ad spending by Chinese e-commerce sellers, such as Temu and fast-fashion firm Shein, UBS analyst Stephen Ju said in a client note Thursday.
"Given what we believe is highly favorable ROI, direct-to-consumer Chinese e-commerce platform ad spend should be durable," Ju wrote.
On the stock market today, Meta stock is down less than 1% at 504.68 in recent action. UBS rates Meta stock as a buy with a price target of 575.
UBS Analyst Sees Broadening Of China-Based Advertisers
Temu is the international-focused subsidiary of Chinese e-commerce giant PDD Holdings. Temu was reportedly Meta's top advertising spender in 2023, with the discount shopping site buying $2 billion worth of ads to reach shoppers in the U.S. and elsewhere. China-founded Shein is also a significant buyer of digital advertising.
"One of the key questions coming out of recent results for Meta and Google is whether the current inflow of ad dollars (particularly in e-commerce) from Chinese marketers selling directly to the U.S. and global population is durable," Ju wrote Thursday.
UBS analyst argue that it is. Temu and Shein fit within a broader "compression" of global retail, as their client note described. Customers in the U.S. and elsewhere can use online platforms like Temu to buy directly from Chinese manufacturers. And every item purchased "directly from a manufacturer ... is an item no longer purchased at retail," Ju wrote.
Meanwhile, Chinese e-commerce companies "typically spend what is an order of magnitude greater amount in marketing versus offline retailers," Ju wrote.
But Shein and Temu have come under regulatory pressure in the U.S., contributing to concerns they could pull back spending. But there are still other China-based companies looking to reach customers in other markets, Ju wrote.
"TikTok, Shein and Temu may be just the tip of the iceberg," Ju said. "Meta's (Q4 earnings call) comments that two-thirds of 2023 China ad revenue came from non-top-10 Chinese advertisers also supports our view."
Meta Stock: Up 40% This Year
In UBS' view, China-based advertisers could push Meta's 2024 ad sales above the current consensus estimates by up to 13%, representing $20 billion in spending. The analysts' estimates assume that other marketers are enticed to follow Temu and Shein's playbook and that Meta continues to capture about 82% of all social media ad spending.
Separately, analysts with Bernstein also released a positive client note on Meta Thursday. The report highlighted a bull-bear debate over Meta's ad growth heading into the second quarter, particularly as the company ramps up AI-related spending. But recent data points are positive for Meta's ad sales, the analyst said.
"Recent data checks suggest that Temu spending has ticked back up in May, while Temu/Shein continue to spend on customer acquisition on Meta globally, even if U.S. spending has tapered," Bernstein analyst Mark Shmulik wrote. "We also note that (Asia-Pacific)-based ad spending is broader than just Temu/Shein and we continue to see strength from app-base ad buyers in the region."
Meanwhile, Meta was the IBD Stock of the Day last week. Shares have formed a cup pattern, as Meta is slowly recovering from a big slide in late April. The stock's pattern has a potential buy point of 531.49, according to IBD MarketSurge.
Even with the slide following its Q1 earnings, Meta stock is ahead 42.5% this year. The S&P 500 has gained 13.5%. Further, Meta shares are ahead 86% from their price a year earlier.
