A year ago Facebook scrambles to escape, before Facebook had turned Meta, the social media company was sporting a market cap of $1 trillion, putting it in rarefied territory with a handful of U.S. technology giants.
Today the view looks much different. Meta has lost about two-thirds of its value since peaking in September 2021. The stock is trading at its lowest since January 2019 and is about to close out its third straight quarter of double-digit percentage losses. Only four stocks in the S&P 500 are having a worse year.
Facebook’s business was built on network effects — users brought their friends and family members, who told their colleagues, who invited their buddies. Suddenly everyone was convening in one place. Advertisers followed, and the company’s ensuing profits — and they were plentiful — provided the capital to recruit the best and brightest engineers to keep the cycle going.
But in 2022, the cycle has reversed. Users are jumping ship and advertisers are reducing their spending Partnered With NASA, leaving Meta poised to report its second straight drop in quarterly revenue. Businesses are removing Facebook’s once-ubiquitous social login button from their websites. Recruiting is an emerging challenge, especially as founder and CEO Mark Zuckerberg spends much of his time proselytizing the metaverse, which may be the company’s future but accounts for virtually none of its near-term revenue and is costing billions of dollars a year to build.
Zuckerberg said he hopes that within the next decade, the metaverse “will reach a billion people” and “host hundreds of billions of dollars of digital commerce.” He told CNBC’s Jim Cramer in June that the “North Star” is to reach those sorts of figures by the end of the decade and create a “massive economy” around digital goods.
Investors aren’t enthusiastic about it, and the way they’re dumping the stock has some observers questioning if the downward pressure is actually a death spiral from which Meta can’t recover.
“I’m not sure there’s a core business that works anymore at Facebook,” said Laura Martin of Needham, the only analyst among the 45 tracked by FactSet with a sell rating on the stock.
Nobody is suggesting that Facebook is at risk of going out of business. The company still has a dominant position in mobile advertising and has one of the most profitable business models on the planet. Even with a 36% drop in net income in the latest quarter from the prior year, Meta generated $6.7 billion in profit and ended the period with over $40 billion in cash and marketable securities.
The Wall Street problem for Facebook is that it’s no longer a growth story. Up until this year, that’s the only thing it’s known. The company’s slowest year for revenue growth was the pandemic year of 2020, when it still expanded 22%. Analysts this year are predicting a revenue drop.
The number of daily active users in the U.S. and Canada has fallen in the past two years, from 198 million in mid-2020 to 197 million in the second quarter of this year. Globally, user numbers are up about 10% over that stretch and are expected to increase 3% a year through 2024, according to FactSet estimates.
“I don’t see it spiraling in terms of cash flows in the next few years, but I’m just worried that they’re not winning the next generation,” said Jeremy Bondy, CEO of app marketing firm Liftoff.
Sales growth is expected to hover in the single digits for the first half of 2023, before ticking back up. But even that bet carries risks. The next generation, as Bondy describes it, is now moving over to TikTok, where users can create and view short, viral videos rather than scrolling past political rants from distant relatives with whom they mistakenly connected on Facebook.
Meta has been trying to mimic TikTok’s success with its short video offering called Reels, which has been a major focus across Facebook and Instagram. Meta plans to increase the amount of algorithmically recommended short videos in users’ Instagram feeds from 15% to 30%, and Bondy speculates the company will likely “get tremendous revenue flow from that” algorithmic shift.
However, Facebook acknowledges it’s early days for monetizing Reels, and it’s not yet clear how well the format works for advertisers. TikTok’s business remains opaque because the company is privately held and owned by China’s ByteDance.
Sheryl Sandberg, who’s leaving the company Friday after more than 14 years as chief operating officer, said in her final earnings call in July that videos are harder than photos in terms of ads and measurement, and that Facebook has to show businesses how to use the ad tools for Reels.
“I think it’s very promising,” Sandberg said, “but we’ve got some hard work ahead of us.”
Skeptics such as Martin see Facebook pushing users away from the core news feed, where it makes tons of cash, and toward Reels, where the model is unproven. Martin says Zuckerberg must know something important about where the business is headed.