After a nearly ten-year period of steady and reliable growth, Meta Platform’s (FB) growth came to a screeching halt recently.
The company’s most recent quarterly earnings call was an unmitigated disaster, and one that clobbered its share price. Meta lost 26% of its overall value, the biggest one-day stock drop in the company’s history.
In total, the company lost $232 billion, setting an all-time record for the biggest one-day value loss in history. Mark Zuckerberg personally lost $31 billion.
The unprecedented nature of the loss begs the question: What happened? Why did Meta stock tank so precipitously, and what does this mean for the company’s future?
Growth is Slowing or Shrinking
A major reason behind Facebook’s success has been its relentless growth. Ever since its inception, Facebook has grown at a rapid pace to now span billions of users. Even when its growth slowed in North America and Europe, the company continued to add users in Africa and Asia. However, at long last, that growth engine appears to be slowing.
For the first time in their history, Facebook lost daily users. To be precise, it lost just 500,000 users – an extremely small fraction of their overall user base. However, the broader story is that growth slowed, stopped, and is reversing.
Facebook directly addressed the popularity of other platforms – in particular TikTok – as being responsible for this slowdown of user growth. Facebook does have its own TikTok competitor, Reels. On Meta’s earnings call, CEO Mark Zuckerberg specifically mentioned the need to continue to grow the Reels platform.
The slowdown did not impact all of Meta’s holdings – only Facebook. Other Meta properties, including Instagram, WhatsApp, and Messenger sustained their growth trajectories.
All of this led to disappointing earnings. Its EPS came in at $3.67 vs. $3.84, despite a smaller beat of its revenue projections.
More concerning, however, was its forecast change. The company is forecasting revenues of between $27-$29 billion during the first quarter of 2022 – well below the $30.15 billion that the company was estimated to clock.
This shows that Facebook doesn’t believe that its revenue problems will be isolated to one quarter, but may be sustained.
Facebook Rebrands to Meta
Facebook rebranded as Meta in an effort to pivot focus away from the company’s main platform and into a new virtual space.
Meta is a signal of the company’s intention to focus on the virtual world, the metaverse. It is intended to allow users to gain access to entirely new digital and augmented reality space. That should translate to revenues one day but so far it’s producing losses.
Investments in the platform have thus far cost the company $10 billion. The continued need for investments in Meta means that more sizeable losses should be expected into the future.
The company has generated “metaverse revenue”, to be sure. It generated $717 million in revenue, and while that number still is vastly outclassed by expenses, management has stated that it expects the platform to be able to generate more revenue in the future.
A variety of revenue streams are being opened up by the focus on the metaverse. This includes the sale of virtual reality and augmented reality equipment, advertising on the platform, and virtual reality real estate.
Apple Privacy and Facebook Advertising
Another source of revenue loss for Meta came from Apple’s new privacy policy.
One of the most popular and ubiquitous smartphone makers in the world recently announced major changes to its tracking software, giving users more control over their information and an enhanced ability to opt out of the information that they share with other apps and websites.
As you would imagine, the vast majority of users have since opted out of this type of ad tracking. The result has been a massive hit to Meta’s bottom line. The company has said that the privacy changes could cost it as much as $10 billion a year, but also noted that estimates may change in the future as more information became available.
Facebook is not the only company that has been negatively affected by these changes, of course – a variety of other company’s that rely on mobile advertising have also been damaged. However, it is clear that the damage has been particularly noticeable for Facebook.
The Aftermath of the Call
Investors and analysts were none-too-pleased with Meta’s earnings report. Many analysts dropped Meta’s ratings and price targets. For example, JP Morgan downgraded Meta from overweight to neutral. It also lowered the FB price target from $385 to $284.
The tectonic shift reverberated around the financial world. One month ago, 38 analysts rated Meta as a Buy, 4 classified it as Overweight, and 11 as a Hold. After the rating call, 31 rated it a Buy, 5 Overweight, and 15 a Hold.
Of course, Meta Platforms remains one of the most popular suite of applications in the world. It is clear that the platform has an array of assets, access to technology, and talent that will sustain massive revenues and profits for years to come. It also has upside revenue optionality with virtual reality and the metaverse.
So, while the share price decline was significant, and the hit to its market capitalization was painful for shareholders, the company is still well-positioned to recover over the long-term.
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