Meta Platforms: An Impressive Start for Threads, but Questions Remain

Meta Platforms Stock at a Glance

• Fair Value Estimate: $278
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide

Meta Stock Update

While we commend the firm’s timing of Threads, a social-media app like Twitter, and are impressed with how quickly the app attained more than 100 million users, uncertainties regarding user retention in the long run and the monetization of Threads remain. Following the news, we are maintaining our $278 fair value estimate of Meta stock.

If Meta applies its other apps’ advertising model while users stay and new ones join, then the likelihood of a two-sided network effect moat source, similar to Facebook and Instagram apps, increases, which could attract advertisers to the app. This could increase Meta’s fair value estimate by around 3%-6%.

Will Threads’ Fast Start Lead to Retained Users?

Meta launched Threads on July 6, only three days after Twitter’s owner, Elon Musk, began restricting the daily number of tweets its users could read, which we think drove many disappointed Twitter users to try Threads. While Threads is now considered the fastest-growing app ever (according to Quiver Quantitative) as it attained 106 million users in only five days, the possibility remains that many are merely testing the app and some will still spend more time on Twitter.

We do believe that advertisers will go where there are users. However, while Threads’ current user count is more than 40% of the 238 million monetizable daily average users that Twitter last reported officially in 2022, advertisers could be hesitant and possibly wait before allocating ad dollars to Threads because of their uncertainty about long-run user retention and engagement. Unlike Stories and Reels—which became new features in Meta’s main apps—Threads is a separate app, which reduces the positive impact of the Facebook or Instagram network effects on its user growth and usage.

Will Advertisers Switch to Threads?

In addition, we do not expect all advertisers that leave or reduce spending on Twitter to simply go to Threads, as other apps including TikTok, Pinterest, and Snapchat represent additional options. However, many could prefer Threads, given its similarity to Twitter.

To increase its chances of maintaining and growing its user count, we think Meta’s Threads should focus mainly on attracting content—bring in as many widely followed Twitter accounts as possible, many of which already do have Threads accounts.

If Meta can continue to attract content creators to Threads and retain the current users on Threads, while monetizing the app through the current advertising model, Threads could add another $2 billion-$3 billion (1%-2% growth) to Meta’s top line every year between 2024 and 2027 based on our estimate of Twitter’s average revenue per user and its user growth. This would increase our estimate of Meta’s valuation to $287 per share.

If Threads’ user count grows to around 300 million by next year, the app’s contribution to Meta revenue could increase to $5 billion-$6 billion (3%-4% growth) per year, which could push our valuation estimate to $294 per share. These estimates assume that our current projections for Meta remain the same and Threads doesn’t cannibalize any ad revenue from Facebook or Instagram.