Fb founder and CEO Mark Zuckerberg arrives to testify following a break throughout a Senate Commerce, Science and Transportation Committee and Senate Judiciary Committee joint listening to about Fb on Capitol Hill in Washington, DC.
Saul Loeb | AFP | Getty Pictures
A yr in the past, earlier than Fb had turned Meta, the social media firm was sporting a market cap of $1 trillion, placing it in rarefied territory with a handful of U.S. expertise giants.
Right this moment the view seems to be a lot completely different. Meta has misplaced about two-thirds of its worth since peaking in September 2021. The inventory is buying and selling at its lowest since January 2019 and is about to shut out its third straight quarter of double-digit proportion losses. Solely 4 shares within the S&P 500 are having a worse yr.
Fb’s enterprise was constructed on community results — customers introduced their family and friends members, who instructed their colleagues, who invited their buddies. Immediately everybody was convening in a single place. Advertisers adopted, and the corporate’s ensuing income — and so they have been plentiful — supplied the capital to recruit the perfect and brightest engineers to maintain the cycle going.
However in 2022, the cycle has reversed. Customers are leaping ship and advertisers are decreasing their spending, leaving Meta poised to report its second straight drop in quarterly income. Companies are eradicating Fb’s once-ubiquitous social login button from their web sites. Recruiting is an rising problem, particularly as founder and CEO Mark Zuckerberg spends a lot of his time proselytizing the metaverse, which often is the firm’s future however accounts for nearly none of its near-term income and is costing billions of {dollars} a yr to construct.
Zuckerberg mentioned he hopes that inside the subsequent decade, the metaverse “will attain a billion individuals” and “host a whole lot of billions of {dollars} of digital commerce.” He instructed CNBC’s Jim Cramer in June that the “North Star” is to succeed in these kinds of figures by the top of the last decade and create a “huge financial system” round digital items.
Buyers aren’t obsessed with it, and the way in which they’re dumping the inventory has some observers questioning if the downward stress is definitely a death spiral from which Meta cannot recuperate.
“I am unsure there is a core enterprise that works anymore at Fb,” mentioned Laura Martin of Needham, the one analyst among the many 45 tracked by FactSet with a promote ranking on the inventory.
No one is suggesting that Fb is liable to going out of enterprise. The corporate nonetheless has a dominant place in cell promoting and has some of the worthwhile enterprise fashions on the planet. Even with a 36% drop in web revenue within the newest quarter from the prior yr, Meta generated $6.7 billion in revenue and ended the interval with over $40 billion in money and marketable securities.
The Wall Avenue downside for Fb is that it is now not a progress story. Up till this yr, that is the one factor it is recognized. The corporate’s slowest yr for income progress was the pandemic yr of 2020, when it nonetheless expanded 22%. Analysts this yr are predicting a income drop.
The variety of day by day lively customers within the U.S. and Canada has fallen prior to now two years, from 198 million in mid-2020 to 197 million within the second quarter of this yr. Globally, consumer numbers are up about 10% over that stretch and are anticipated to extend 3% a yr by 2024, based on FactSet estimates.
“I do not see it spiraling when it comes to money flows within the subsequent few years, however I am simply frightened that they are not profitable the subsequent era,” mentioned Jeremy Bondy, CEO of app advertising agency Liftoff.
Gross sales progress is anticipated to hover within the single digits for the primary half of 2023, earlier than ticking again up. However even that guess carries dangers. The subsequent era, as Bondy describes it, is now transferring over to TikTok, the place customers can create and consider quick, viral movies somewhat than scrolling previous political rants from distant relations with whom they mistakenly related on Fb.
Meta has been attempting to imitate TikTok’s success with its quick video providing known as Reels, which has been a significant focus throughout Fb and Instagram. Meta plans to extend the quantity of algorithmically advisable quick movies in customers’ Instagram feeds from 15% to 30%, and Bondy speculates the corporate will possible “get large income stream from that” algorithmic shift.
Nevertheless, Fb acknowledges it is early days for monetizing Reels, and it is not but clear how properly the format works for advertisers. TikTok’s enterprise stays opaque as a result of the corporate is privately held and owned by China’s ByteDance.
Sheryl Sandberg, who’s leaving the corporate Friday after greater than 14 years as chief working officer, mentioned in her closing earnings name in July that movies are tougher than images when it comes to advertisements and measurement, and that Fb has to indicate companies tips on how to use the ad instruments for Reels.
“I believe it’s extremely promising,” Sandberg mentioned, “however we have got some exhausting work forward of us.”
Skeptics corresponding to Martin see Fb pushing customers away from the core information feed, the place it makes tons of money, and towards Reels, the place the mannequin is unproven. Martin says Zuckerberg should know one thing vital about the place the enterprise is headed.
“He would not be hurting its income on the identical time he wants more cash, until he felt just like the core enterprise wasn’t sturdy sufficient to face alone,” Martin mentioned. “He should really feel he has to attempt to transfer his viewership to Reels to compete with TikTok.”
A Fb spokesperson declined to remark for this story.
Zuckerberg has at the very least one main motive for concern past simply stalled consumer progress and a slowing financial system: Apple.
The 2021 iOS privateness replace, known as App Monitoring Transparency, undermined Fb’s means to focus on customers with advertisements, costing the corporate an estimated $10 billion in income this yr. Meta is relying on synthetic intelligence-powered promoting to ultimately make up for Apple’s modifications.
Which will quantity to little greater than a Band-Help. Chris Curtis, a web-based advertising knowledgeable and guide, has seen social networks rise and fall as traits change and customers transfer alongside. And that downside is not solvable with AI.
“I am sufficiently old, and I used to be there when MySpace was a factor,” mentioned Curtis, who beforehand labored at Anheuser-Busch and McKinsey. “Social networks are switchable, proper?”
While you take a look at Meta’s consumer numbers, Curtis mentioned, they counsel the corporate is “not in an excellent place.”
‘Power for good or evil’
The final time Fb’s market cap was this low, it was early 2019 and the corporate was coping with the continued fallout of the Cambridge Analytica privacy scandal. Since then, Facebook has suffered further reputational damage, most notably from the documents leaked last year by whistleblower and former employee Frances Haugen.
The main takeaway from the Haugen saga, which preceded the name change to Meta, was that Facebook knew of many of the harms its products caused kids and was unwilling or unable to do anything about them. Some U.S. senators compared the company to Big Tobacco.
Former Facebook employee and whistleblower Frances Haugen testifies during a Senate Committee on Commerce, Science, and Transportation hearing entitled ‘Protecting Kids Online: Testimony from a Facebook Whistleblower’ on Capitol Hill, in Washington, U.S., October 5, 2021.
Jabin Botsford | Reuters
Denise Lee Yohn, author of brand-building books including “What Great Brands Do” and “Fusion,” said there’s little evidence to suggest that Facebook’s rebranding to Meta late last year has changed public perception of the company.
“I think the company still suffers from a lot of criticism and skepticism about whether they are a force for good or evil,” Yohn said.
Rehabilitating a damaged brand is difficult but not impossible, Yohn said. She noted that in 2009, Domino’s Pizza was able to successfully come back from a crisis. In April of that year, a video made as a prank by two restaurant employees went viral, showing one of them doing disgusting acts with food while cooking in one of the company’s kitchens. Both employees were arrested and charged with food contamination.
In December 2009, Domino’s launched a marketing blitz called the “Pizza Turnaround.” The stock climbed 63% in the first quarter of 2010.
Yohn said the company’s approach was, “We’ve been told our pizzas suck, and so we’re actually going to make substantive changes to what we are offering and change people’s perceptions.” While it sounded initially like “just marketing speak,” Yohn said, “they actually really did change.”
Zuckerberg, on the other hand, is not “coming across as a leader who is serious about changing his culture and about changing himself and about kind of creating a company that will be able to step into the future that he’s envisioning,” she said.
Meta’s reputational hit could also harm the company’s ability to recruit top-tier talent, a stark contrast to a decade ago, when there was no more prized landing spot for a hotshot engineer.
A former Facebook ad executive, who spoke on condition that his name not be used, told CNBC that even though TikTok is owned by a Chinese parent, it now has an edge over Meta when it comes to recruiting because it’s viewed as having less “moral downside.”
Ben Zhao, a computer science professor at University of Chicago, said he’s seeing that play out on the ground as an increasing number of students in his department are showing interest in working for TikTok and ByteDance.
In order to stay competitive, given how the market has punished tech stocks this year, Zhao said, Meta and Google are “having to pay more and are having certainly to hand out more lucrative stock options and packages.”
The bull case
Still, Zuckerberg has a history of proving his doubters wrong, said Jake Dollarhide, the CEO of Longbow Asset Management in Tulsa, Oklahoma.
Dollarhide remembers when investors ran from Facebook not long after its 2012 IPO, scoffing at the company’s ability to move “from the PC to the mobile world.” Facebook’s mobile business quickly caught fire and by late 2013, the stock was off to the races.
Zuckerberg’s success in pivoting to mobile gives Dollarhide confidence that Meta can cash in on its bet-the-farm move to the metaverse. In the second quarter, Meta’s Reality Labs division, which houses its virtual reality headsets and related technologies, generated $452 million in revenue, about 1.5% of total Meta sales, and lost $2.8 billion.
“I think Zuckerberg is very bright and very ambitious,” said Dollarhide. “I wouldn’t bet against Zuckerberg just like I wouldn’t bet against Elon Musk.”
Dollarhide’s firm hasn’t owned Facebook shares, though, since 2014, preferring the trajectory of tech companies such as Apple and Amazon, two of his top holdings.
“The reality is they can be perceived as a value company and not a growth company,” Dollarhide said, regarding Meta.
No matter what happens in the next year or two or even three, Zuckerberg has made clear that the future of the company is in the metaverse, where he’s banking on new businesses forming around virtual reality.
Zhao, from University of Chicago, says there’s immense uncertainty surrounding the metaverse’s prospects.
“The real question is — are daily users ready for the metaverse yet?” Zhao said. “Is the underlying technology ready and mature enough to make that transition seamless? That’s a real question and that may not be all up to Facebook or Meta at this point.”
If Zuckerberg is right, perhaps 10 years from now Meta’s stock price from the depths of 2022 will look like the discount of the decade. And if that happens, predictions of a death spiral will be mocked like a 2012 cover story from Barron’s, headlined “Facebook is worth $15” with a thumb pointing down. Four years later, it was trading near $130.
WATCH: Needham’s Martin is a Meta skeptic