Meta's calamitous share price drop is the result of a noxious combination of boring content and squandered user trust, as well as the privacy changes that threaten the digital advertising market it dominates.
Earnings published on Wednesday offer a clue as to why Facebook rebranded to Meta late last year. The company needs a compelling story to deflect attention from its slowing growth. Claiming a stake in the metaverse — a brand new version of the internet — is one idea. It may not be enough. A 25 per cent share price crash proves investors are more concerned with the existing advertising business than intangible visions of the future.
To make matters worse, Meta's problems coincide with regulators sharpening antitrust pens and rising rates driving down inflated valuations across the tech sector.
Meta needs to get better at explaining its transformations and when they will become profitable. First, there is the metaverse, a still vague idea of an immersive online experience that Morgan Stanley analysts claim has an US$8tn total addressable market. For the first time Meta has opened up its financials to show the numbers behind Reality Labs, the virtual reality unit that will supposedly tap into this world. But it is hard to get very excited about a unit with a US$3.3bn operating loss on US$877mn of quarterly revenue. When Amazon broke out cloud division sales for the first time in 2015 they accounted for 7 per cent of the group total. Reality Labs equals less than 3 per cent.
At the same time, Meta is trying to account for changes in its main advertising business. Competition from addictive short video platform TikTok means slowing user growth. Daily active user numbers are down on the previous quarter. Meta's comeback is the inferior short video product Instagram Reels. But short videos mean less adverts. Add in privacy changes and the result is less money. Revenue growth has slowed from 35 per cent year on year in the last quarter to 20 per cent. The current period should climb by only 11 per cent. Operating margins are falling.
However, some perspective is required. Meta has a reputation for ultra-cautious forecasts. It remains a company with 3.59bn users visiting at least one of its apps per month. Digital advertising is a growing market and chief executive Mark Zuckerberg has presided over revenue-raising transformations before. It is too early to declare Meta's metamorphosis a bust.
The Lex team is interested in hearing more from readers. Has Meta hit a virtual wall, or is this simply another evolutionary stage for the social media company? Please tell us what you think in the comments section below.
- Financial Times