Facebook CEO Mark Zuckerberg testifies earlier than the U.S. House Financial Services Committee throughout An Examination of Facebook and Its Impact on the Financial Services and Housing Sectors listening to on Capitol Hill in Washington on Oct. 23, 2019.
Xinhua News Agency | Getty Images
A yr in the past, earlier than Facebook 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.
Today the view appears to be like a lot totally 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. Only 4 shares within the S&P 500 are having a worse yr.
Facebook’s enterprise was constructed on community results — customers introduced their family and friends members, who informed their colleagues, who invited their buddies. Suddenly everybody was convening in a single place. Advertisers adopted, and the corporate’s ensuing income — and so they had been plentiful — offered the capital to recruit one of the best and brightest engineers to maintain the cycle going.
But in 2022, the cycle has reversed. Users are leaping ship and advertisers are lowering their spending, leaving Meta poised to report its second straight drop in quarterly income. Businesses are eradicating Facebook’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 throughout the subsequent decade, the metaverse “will reach a billion people and “host lots of 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 “large financial system” round digital items.
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 cannot get better.
“I’m undecided there is a core enterprise 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 do not see it spiraling by way of money flows within the subsequent few years, however I’m simply fearful that they are not profitable the subsequent technology,” 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 great income move 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 on Friday after over 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 believe it is very promising,” Sandberg said, “however we have got some laborious work forward of us.”
Skeptics like 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.
“He would not be hurting its income on the identical time he wants more cash, except he felt just like the core enterprise wasn’t robust sufficient to face alone,” Martin said. “He should really feel he has to attempt to transfer his viewership to Reels to compete with TikTok.”
A Facebook spokesperson declined to comment for this story.
Zuckerberg has at least one major reason for concern beyond just stalled user growth and a slowing economy: Apple.
The 2021 iOS privacy update, called App Tracking Transparency, undermined Facebook’s ability to target users with ads, costing the company an estimated $10 billion in revenue this year. Meta is counting on artificial intelligence-powered advertising to eventually make up for Apple’s changes.
That may amount to little more than a band-aid. Chris Curtis, an online marketing expert and consultant, has seen social networks rise and fall as trends change and users move along. And that problem isn’t solvable with AI.
“I’m sufficiently old and I used to be there when MySpace was a factor,” said Curtis, who previously worked at Anheuser-Busch and McKinsey. “Social networks are switchable, proper?”
When you look at Meta’s user numbers, Curtis said, they suggest the company is “not in a very good place.”
‘Force for good or evil’
The last time Facebook’s market cap was this low, it was early 2019 and the company was dealing 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 believe the corporate nonetheless suffers from a whole lot of criticism and skepticism about whether or not they’re a drive 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 informed our pizzas suck, and so we’re really going to make substantive modifications to what we’re providing and alter folks’s perceptions.” While it sounded initially like “simply advertising communicate,” Yohn said, “they really actually did change.”
Zuckerberg, on the other hand, is not “coming throughout as a frontrunner who’s severe about altering his tradition and about altering himself and about sort of creating an organization that may be capable to step into the longer term that he is 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 “ethical draw back.”
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 extra and are having actually to handout extra profitable inventory choices 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 cellular 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 believe Zuckerberg could be very vibrant and really formidable,” said Dollarhide. “I would not wager in opposition to Zuckerberg similar to I would not wager in opposition to Elon Musk.”
Dollarhide’s firm hasn’t owned Facebook shares, though, since 2014, preferring the trajectory of tech companies like Apple and Amazon, two of his top holdings.
“The actuality is they are often perceived as a price firm and never a development firm,” 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 actual query is — are every day customers prepared for the metaverse but?” Zhao said. “Is the underlying expertise prepared and mature sufficient to make that transition seamless? That’s an actual query and that is probably not all as much as Facebook or Meta at this level.”
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 price $15” with a thumb pointing down. Four years later, it was buying and selling close to $130.
WATCH: Needham’s Martin is a Meta skeptic
Source: www.cnbc.com”