Why the Unmitigated Meta Meltdown Matters

Although Zuck has been trying to change the conversation by focusing attention on the so-called metaverse, reality bit when quarterly results were announced, revealing that Facebook lost users for the first time in its history (boredom, disgust or both), that TikTok is stealing younger Facebook users as anecdotal evidence had suggested and, most importantly, that Apple's changes making it harder to track iPhone users' digital behavior are definitely going to hurt ad revenue for all tech companies reliant on that personal data. 

In other words, spending $10 billion on the future of the metaverse is not going to deflect attention away from the harsh reality of declining revenues and profits now. JL

Andrew Ross Sorkin reports in the New York Times:

Investors have sent Zuckerberg a strong message about the current state of his company, with Meta’s shares dropping 22% in after-hours trading - erasing $175 billion in market value - in response to disappointing quarterly results: Facebook reported the first drop in users in its history, and the company is losing users to TikTok, especially younger ones; ad revenue would be down $10 billion this year because of recent changes that make it more difficult to track iPhone’s users’ digital habits. (And) Meta spent $10 billion on its Reality Labs Division for the exciting future of virtual worlds in the metaverse.

Lately, Mark Zuckerberg has been redirecting investors’ attention away from Facebook’s existing social media platforms and toward the exciting future of virtual worlds in the metaverse. (The company is now called Meta, after all.)

But those investors have sent Zuckerberg a strong message about the current state of his company, with Meta’s shares dropping as much as 20 percent in after-hours trading — erasing more than $175 billion in market value — in response to a disappointing set of quarterly results. The tech analyst Dan Ives of Wedbush Securities summed up the quarter as “an unmitigated disaster.”

What happened?

It’s not just the metaverse. The biggest hit to profits, which declined 8 percent in the fourth quarter and fell shy of analyst estimates, was spending on the Reality Labs division. Meta said it spent $10 billion last year on technologies developed by the unit that could eventually allow it to host users in a virtual world. That is an eye-catching sum — but investors knew that spending was coming. Other factors better explain the stock plunge.

 

Apple’s new privacy features are hitting Meta’s ad business. Meta said that its ad revenue would be down by about $10 billion this year because of recent changes that make it more difficult to track iPhone’s users’ digital habits. In the current quarter, Meta said that sales were set to grow as little as 3 percent, the slowest increase in the company’s history. Set against Google’s robust ad business, it seems that some advertisers are shifting to search platforms instead of social media. Shares of Pinterest, Snap and Twitter also fell sharply after Meta announced its results; those companies will report results soon.

Image

TikTok is proving a formidable rival. Facebook’s namesake app reported the first (small) drop in users in its history. On yesterday’s earnings call, Zuckerberg acknowledged that the company is losing users to TikTok, especially younger ones. Meta’s offerings in video, including Instagram’s Reels, can compete with TikTok for attention, but “it will take a while to compound and catch up there,” Zuckerberg said. Meta may be further ahead in establishing itself in the metaverse, but that remains “a far-off revenue opportunity,” said Ives of Wedbush.

Does Meta’s big miss spell trouble for other corporate earnings? Things were looking pretty good at the halfway point of earnings season, as we noted yesterday, but the stock market’s four-day winning streak looks in danger today, based on futures trading. In part, that is because investors are punishing companies for missing analyst expectations more harshly than in the past, according to FactSet. Spotify’s slower-than-expected growth forecast was savaged by investors, as was PayPal’s similarly disappointing guidance (more on that below). Away from tech, industrial companies have been reporting relatively strong results, with Shell reporting bumper profits this morning. Back in tech, Amazon, which reports later today, could change the narrative yet again.