Meta initiated hold at Benchmark as ad problem is 'getting worse, not better'
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Meta Platforms (NASDAQ:FB) has an advertising problem that is "getting worse, not better" as Benchmark initiated coverage on the Mark Zuckerberg-led company.
Analyst Mark Zgutowicz started coverage with a hold rating and no price target, noting that while Apple's (NASDAQ:AAPL) iOS changes have put an obvious hamper on Meta's advertising targeting capabilities, it looks like engagement on Facebook and Instagram "may finally have cracked" and the company's newest product, Reels, will not be able to carry both platforms. 
"While we have heard consistent groans from small businesses on deteriorating Facebook return on ad spend since iOS 14.5 became enforced last May, the strongest complaints are coming in now (February), with some seeing campaigns in the red for the first time ever," Zgutowicz wrote in a note to clients.
The analyst added that it's not yet clear for the root cause other than potential reduced targeting inputs hurting the algorithm. However, Zgutowicz pointed out the return on ad spend mechanics are working against advertisers and publishers, with cost per thousand ad impressions "astronomically high," click-thru rates have improved and cost per clicks are elevated, all hurting return on ad spend. 
Meta shares fell nearly 1% to $209.10 in premarket trading on Tuesday. 
Meta's biggest competitor is ByteDance's (BDNCE) TikTok, which now has more than 1 billion monthly active users, including nearly 200 million in the U.S., compared to 240 million for Meta.
The analyst noted that Tik Tok leads in engagement over Reels because it prioritizes the content and it's a simple platform for creators, while Reels has fallen behind due to "more restrictive algorithms that tap big names and curated content."
In addition, metaverse spending is "fast and furious" Zgutowicz explained, while pointing out there is no line of sight on long-term returns, with estimates of accumulated losses of "at least $60 billion" since 2019.
Meta, along with YouTube (GOOG, GOOGL) recently blocked access to Russian news outlets like RT amid Russia's invasion of Ukraine.