Stock Analysis & Ideas

Facebook: Instagram Reels Could Keep TikTok at Bay, Says 5-Star Analyst

One of the year’s hottest non-Covid topics has been the rise of Gen Z’s app of choice, TikTok. The Chinese video-sharing app has been grabbing headlines left and right, with it trolling Trump’s reelection campaign as well as facing a US ban over concerns it is a threat to national security.  

Not one to miss an opportunity to ride the latest trend, Facebook (FB)-owned Instagram recently launched what appears to be its own version of TikTok, calling it Instagram Reels.

Deutsche Bank analyst Lloyd Walmsley ponders the impact of the latest addition to the Facebook arsenal.

“We think the introduction of Instagram Reels is a nice potential positive around engagement, at least some of which we would think of as incremental, on what should be a highly monetizable surface. In addition, we see Reels as a nice defensive move to help retain usage that might have otherwise shifted to TikTok,” the 5-star analyst opined.

Walmsley assumes that just “a modest increase in time spent at healthy ad loads and monetization,” could provide Instagram with an 18% revenue increase and a 6% uptick for FB ad revenue.

As expected, then, it is all about the advertising opportunity. So, the question is, can Reels be better monetized than Stories or Newsfeed? In contrast to both of these features where sound is used 60-70% of the time, Walmsley, not unreasonably, anticipates Reels’ sound will be used almost 100% of the time. This potentially means higher engagement and “longer dwell time on ads,” resulting in higher ad prices.

“Ad pricing is largely a function of click-through-rate and ultimate downstream conversion,” Walmsley said. “And while we do not make any specific assumptions here, we ultimately think this format can likely drive more influence on ultimate conversion activity, resulting in higher effective ad prices.”

To this end, Walmsley keeps a Buy rating on FB shares, while his $305 price target implies a modest 3% upside from current levels. (To watch Walmsley’s track record, click here)

All in all, Facebook remains a firm favorite on Wall Street. FB’s Strong Buy consensus rating is based on 30 Buys, 4 Holds and 1 lone Sell. However, with a year-to-date uptick of 44%, the $291.71 average price target indicates shares could stay range bound for now. (See Facebook stock-price forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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