A year ago, before Facebook morphed into Meta, the social networking company had a market cap of $1 trillion, putting them in the rare club, sitting on the same platter with some of America’s tech giants. .
As of today the situation seems to be much different. Meta has lost about two-thirds of its value since peaking in September 2021. The stock is trading at its lowest level since January 2019 and is about to end its third straight quarter with a double-digit percentage drop. Only four S&P 500 stocks are seeing worse stock price declines than Meta.
Facebook’s business is built on network effects: Users bring in friends, family members, and invite their colleagues to join. Suddenly everyone gathered in one place. Then advertisers were also attracted here and as a result, Meta made huge profits. With money in hand, Meta attracts and recruits the best and brightest engineers to keep the business cycle alive.
But in 2022, the cycle has reversed. Users are leaving and advertisers are reducing their spend, leaving Meta could be on the verge of reporting a second consecutive drop in quarterly revenue. Businesses are removing Facebook’s once-popular social login button from their websites.
Recruitment is also an emerging challenge, especially as founder and CEO Mark Zuckerberg spends a lot of time developing the metaverse, which could be the company’s future but mostly. generates no revenue in the short term and costs billions of dollars a year to build.
Zuckerberg said he hopes that within the next decade, the metaverse “will reach a billion people” and “Manage hundreds of billions of dollars in digital commerce“. He told CNBC’s Jim Cramer in June that “North Star” would hit those numbers by the end of the decade and create a “big economy” around digital goods.
Investors were not enthusiastic about that idea, and the way they dumped stocks led some observers to question whether the downward pressure was really a “death spiral” from which Meta could not recover. return or not.
Needham’s Laura Martin, the only analyst out of 45 people tracked by FactSet with a Meta sell rating, said:I’m not sure if any of the core businesses are still active at Facebook“.
No one thinks Facebook is in danger of going out of business. The company still has a dominant position in mobile advertising and is one of the most profitable business models on the planet. Even with net sales falling 36% in the latest quarter year over year, Meta generated a profit of $6.7 billion and ended the period with more than $40 billion in cash.
Wall Street’s problem for Facebook is that the company is no longer a growth story. Until this year, that’s the only thing they’ve encountered. The company’s slowest year of revenue growth was pandemic year 2020, when revenue was still up 22%. But analysts this year are predicting a drop in revenue.
The number of daily active users in the US and Canada has decreased over the past two years, from 198 million in mid-2020 to 197 million in the second quarter of this year. Globally, the number of users grew by about 10% in that time period and is expected to grow by 3% a year through 2024, according to FactSet estimates.
“When you look at the number of users of Meta, you will see that the company is in a bad position“.
Jeremy Bondy, CEO of app marketing firm Liftoff said: “I don’t see a cash flow issue emerging over the next few years, but I’m just worried they won’t win the next generation of users.“.
Sales growth is expected to be in single digits in the first half of 2023, before picking up again. But even that bet is risky. The next generation of users, as Bondy describes it, are now turning to TikTok, where users can create and watch short, viral videos.
Meta has been trying to mimic TikTok’s success with a short video offering called Reels, which has become a major hit on Facebook and Instagram. Meta plans to increase the number of algorithmically recommended short videos in users’ Instagram feeds from 15% to 30%, and Bondy predicts the company will likely “get a huge revenue stream from that algorithm change“.
However, Facebook admits that Reels monetization is in its early days, and it remains unclear how well the format works for advertisers. TikTok’s business is still unclear as the company is privately owned.
Sheryl Sandberg, who recently left the company after more than 14 years as chief operating officer, said during an earnings call in July that videos are harder than photos in terms of advertising and measurement, and Facebook must show How businesses use advertising tools for Reels.
“I think this feature is very promising,” said Sandberg, “But we still have some hard work ahead of us“.
Skeptics like Martin argue that Facebook is pushing users away from the core news feed, where it generates tons of cash, and toward Reels, where the model is unproven. Martin said that Zuckerberg must know something important about the position of the business.
A Facebook spokesperson declined to comment for this story.
Zuckerberg has at least one main reason to be concerned aside from stagnant user growth and a slowing economy: Apple.
The 2021 iOS privacy update, called App Tracking Transparency, weakened Facebook’s ability to target users with ads, costing the company about $10 billion in revenue. in this year. Meta is relying on artificial intelligence-driven advertising to eventually make up for the losses caused by Apple’s change.
That amount may be a bit more than Band-Aid. Chris Curtis, an online marketing expert and consultant, has seen social media rise and fall as trends change and users move with them. And that problem cannot be solved with AI.
“When you look at Meta’s user base, you’ll see the company isn’t in a good position,” said Curtis, who previously worked at Anheuser-Busch and McKinsey.
“GOOD OR Evil”
The last time Facebook’s market capitalization was this low was in early 2019 when the company was dealing with the ongoing aftermath of the Cambridge Analytica privacy scandal. Since then, Facebook has suffered further reputational damage, most notably from documents leaked last year by accuser and former employee Frances Haugen.
The main takeaway from Haugen’s story is that Facebook knows much of the harm its products do to children but doesn’t want or can’t do anything about them. Some US senators have compared the company to Big Tobacco.
Denise Lee Yohn, author of branding books including “What Great Brands Should Do” and “Incorporate,” says there’s little evidence that Facebook rebranded to Meta as of late. Last year changed the public perception of the company.
John said: “I think the company still suffers from a lot of criticism and skepticism about whether they are a force for good or evil.“.
Restoring a damaged brand is difficult but not impossible, says Yohn. She noted that in 2009, Domino’s Pizza was able to successfully bounce back from the crisis. In April of that year, a video made as a joke by two restaurant employees went viral online, showing one of them committing a disgusting act with food while cooking at one of the restaurants. corporate kitchen. Both employees were arrested and charged with food contamination.
In December 2009, Domino’s launched a marketing campaign called “Revolving Pizza”. Shares rose 63% in the first quarter of 2010.
On the other hand, Zuckerberg is not “a leader who is serious about changing culture, changing himself, and about creating a company that can move into the future he envisions”, she said.
Meta’s reputational success could also hurt the company’s ability to recruit top talent, in stark contrast to a decade ago.
Ben Zhao, a professor of computer science at the University of Chicago, said he’s noticed that’s happening in practice as more and more students in his department are expressing interest in working for TikTok and ByteDance.
To remain competitive, Meta and Google are “paying more, and definitely have to offer more lucrative stock options and packages,” Zhao said.
WILL MARK ZUCKERBERG WILL BE RIGHT?
Jake Dollarhide, CEO of Longbow Asset Management in Tulsa, Oklahoma, said Zuckerberg has a history of proving his doubters wrong.
Dollarhide recalls when investors left Facebook shortly after its 2012 IPO, mocking the company’s ability to move “from PC to mobile world”. Facebook’s mobile business quickly exploded, and by the end of 2013, the stock was back on track.
Zuckerberg’s success in moving to mobile gives Dollarhide confidence that Meta can monetize the metaverse. In the second quarter, Meta’s Reality Labs division, which has virtual reality headsets and related technologies, generated $452 million in revenue, about 1.5% of total Meta sales, and a loss of $2.8 billion. USD.
Dollarhide said: “I think Zuckerberg is a very smart and ambitious person. I wouldn’t bet against Zuckerberg any more than I wouldn’t bet against Elon Musk“.
However, Dollarhide’s company hasn’t owned Facebook stock since 2014. Apple and Amazon are two of his top favorites.
“The fact that they can be seen as a value company, not a growth company“, Dollarhide commented on Meta.
Regardless of what happens in the next five or two or even three years, Zuckerberg has made it clear that the future of the company is in the metaverse, where he focuses on nascent businesses around virtual reality. .
Zhao, from the University of Chicago, says there is great uncertainty around the outlook for the metaverse.
“The real question is – are everyday users ready for the metaverse?“Zhao said. “Is the underlying technology ready and mature enough to make that transition seamless? It’s a real question and that may not be on Facebook or Meta at this point“.
If Zuckerberg is right, maybe 10 years from now, Meta’s stock price from the depths of 2022 will look like the drop of the decade. And if that happens, death spiral predictions will be derided as a 2012 Barron’s cover story, titled “Facebook is worth $15.” Four years later, Facebook stock is trading for nearly $130.