What Really Took Down Meta

February 8, 2022

Last week the stock market got a rude wake up call. One that took it down two and a half percent in one day. The cause of this shake up?

Meta Platforms (the company that used to be known as Facebook) cut its 2022 first-quarter revenue projection to the range of $27 billion to $29 billion, compared to Wall Street’s expectations of $30.15 billion.

When you’re “priced for perfection” like Meta, any bad news is unacceptable. It’s like walking on a highwire across the Grand Canyon without a net. One slip up, and it’s a long way down.

To make things worse, Meta is one of the eight “big tech” companies that make up roughly one-third of the market cap of the entire 500-company index. So while Mark Zuckerberg personally lost some $23 billion (not to worry, he still has about $85 billion left), the move by his company’s stock shook the entire market. 

Let’s take a look at what went wrong and an investing strategy that can be a much safer bet during a time when so much of the market is dominated by so few stocks…

The Fall of a Giant

It wasn’t so much of a fall as a really big stumble. And it came with some serious implications.

Despite its mega-cap status, Meta is still considered a growth stock. And what makes growth companies so attractive is their potential for increasing growth. It’s not necessarily the absolute revenue numbers they put up. But rather their ability to increase those numbers quarter over quarter. Even if they don’t have earnings. 

But when you go from a fast-growing company to a less-than–fast-growing company, you come under the microscope. Miss a revenue estimate or worse, lower your forward guidance like they did and the hammer is coming down.

The lowered guidance has come as the result of a couple things.  First, it’s losing market share. My wife hates it when I say this because she loves Facebook but Facebook is becoming an old persons’ platform.

Early on it had a virtual monopoly on the 18 to 20-something demographic. Today many younger social media users are favoring other platforms like Tik Tok and Snapchat. 

Second, about a year ago, Apple implemented an “Ask to Track” privacy feature in their iOS 15. All the apps that ran on their platform had to ask permission to track their users across other apps. Roughly 84% of Apple users started saying “No!”

This limited Meta’s ability to serve targeted ads to their users. It’s estimated that move has cost Meta some $10 billion in ad revenue over the last two years.

But the really big problem is Meta’s investment in the metaverse. The company reported they lost over $10 billion in 2021 alone. This loss wasn’t unexpected. The evolution of the metaverse is expected to take some time. But nobody — even Mark Zuckerberg —knows what the finished product is going to be. So this is a pretty huge bet for them.

Is Meta in Trouble?

If, over the next two reporting quarters, Zuckerberg and Meta can stabilize their market share and boost revenues back up, they’ll be fine. 

But the bigger issue will be generating some kind of ROI on their investment in the metaverse. The big hedge funds that own Zuck’s stock won’t wait forever. So it’s going to be challenging for Meta for the near future.

But there’s a better strategy for investors who want to invest in the great unknown.

And I’ll tell you about that in your next letter.

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily