3 Dangerous Facts that Most Investors Don't Understand about Meta
Facebook (Meta) is crashing! Should You Buy or Sell?
Meta crashed more than 25% in the worst 1 day drop in stock market history. This wiped out about $250 billion from the company. Mark Zuckerberg saw $31b wiped out from his net worth all in a day. It is not common for a big tech blue chip company to drop so much in a single day.
In this piece, we’ll look at 3 reasons why the stock price crashed based on the company’s latest financial results. We’ll also explore 3 headwinds that we should watch out for when investing in the company.
3 Reasons Why
In my view, there are 3 main reasons why the stock sold off.
1. Slowing Revenue Growth
Revenue growth rate has slowed and earnings were 5% lower (from $3.88 in Q4 2020 vs $3.67 in Q4 2021).
2. Decrease in Facebook Daily Active Users (DAU)
Facebook Daily Active Users (DAU) decreased by 1 million between Q4 and Q3 ($1.93 billion to $1.929 billion). The decrease in DAU on a quarter-on-quarter basis was the first in the company’s history.
3. Weak Guidance for Q1 2022
Meta issued poor guidance for 2022 Q1, citing a 3% to 11% expected growth. The company also forecasted revenues of between $27 billion to $29 billion. This was lower than analyst expectations of $30 billion.
3 Dangers to Watch Out For
1. Attention
Attention is the number ONE most scarce and valuable resource today. The attention span of humans are getting lower and lower by the day.
Facebook is a social media platform at its core. People use social media to entertain themselves. The most entertaining platform is the one that gets the most attention and eyeballs. Profits and market share will follow.
Facebook derives its revenue from advertisers displaying their ads on their platform. With display ads, attention is the key currency.
The ad revenue model goes like this:
Get the user’s attention, show them ads, and then monetise.
In today’s digital age, there is an increasing demand for video content. It is an area which TikTok are exceling in with their short form video content. TikTok captures eyeballs by giving youngsters their daily dopamine kick. It is entertaining AND addictive. Once you start, you can’t stop (short of uninstalling the app on your phone).
Retaining users on Facebook as a social media of choice is key to attracting advertisers. With new and strong competition such as TikTok entering the space, a reduction in Facebook’s DAU is a cause for concern.
2. Less Ad Spend by Advertisers on Facebook
Investors fear that the latest iOS changes are going to affect Facebook. The weak guidance issued by the company only spooked them further.
With the iOS privacy changes, advertisers might find it harder to target iPhone users on Facebook. This could result in advertisers reducing their ad budget as the ads become less effective.
How Does iOS 14.5 Affect Facebook?
An extract from The Verge explains this perfectly:
The feature, introduced in iOS 14.5, is meant to prevent app-makers from tracking what you do and selling that information to advertisers. Companies like Facebook cried foul when it was introduced, saying that it would hurt their ability to show targeted, personalized ads, and therefore hurt businesses that relied on those ads.
Facebook is highly dependent on operating systems (iOS and Android). They are at the mercy of companies like Apple and Google. These companies can decide to introduce privacy changes to their OS anytime. When this happens, it negatively impacts the company’s revenue. We have already seen this happening with Apple. Meta estimates that Apple’s iOS changes will result in a $10 billion reduction in their revenue. While this figure might seem huge, it’s less than 10% of the company’s FY 2021 revenue. Perhaps Meta needs to explore how it can develop its own independent operating system to reduce its reliance on iOS and Android.
3. Will Reality Labs Be Successful?
Facebook calls their metaverse business segment Reality Labs (RL). CEO Mark Zuckerberg keeps talking about the metaverse. I am of the view that he is looking into the metaverse to develop a moat for Facebook. This is why we see the company’s commitment to spending $25 billion a year into developing its metaverse business.
Reality Labs (RL) includes augmented and virtual reality related consumer hardware, software and content. As it stands, revenue from their RL business makes up only 2% of the company’s total revenue.
We can see that the operating loss from the company’s RL business has been increasing every year. Reality Labs business recorded an operating loss of $10.2 billion in FY2021. This is an increase from a loss of $6.6 billion in FY2020.
For a company to grow a new business segment, there will be costs incurred in research and development. At the early stages, seeing operating losses is very normal. What’s uncertain is whether Reality Labs will grow and bear fruit for Meta in the future.
My Take on Meta
Facebook has 2.8 billion users (this is about 35% of the total world population). Given the size of the company, its growth is naturally going to slow down at some point.
The point of greater concern would be the company’s longer term outlook (5 years or more). This outlook would depend on whether the company can continue to innovate and execute on a high level.
At this moment, TikTok is still a small player, just like Facebook was in 2012. Can it grow and execute as well as Facebook did over the last decade? Only time will tell.
Should You Buy or Stay Away?
The answer to this depends on several factors. The competition is definitely real for Meta. If you invest in the company, you have to be willing to put up with a good dose of uncertainty. If you’re not comfortable, there are many other alternatives to consider.
If you have a large holding (more than 5% allocation), consider trimming down and reallocating to other stocks. There are many stocks selling at juicy discounts now.
It’s worth noting that even if you’re selling at a loss, you’re entering other positions at a lower price as well. Many investors (myself included) struggle with this common loss aversion bias.
If you have an allocation of 5% or lower, I’d hold and do nothing.
If you do not have a position in Meta, I’d look elsewhere due to the amount of good opportunities available.
Personally I have a position in Meta and I will be holding out during this period of share price volatility. Not adding but not selling either. The company is still showing decent growth, and I feel that the selloff was a knee-jerk reaction. One quarter does not make a bad company.
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