Analysts are hoping to see progress after a disappointing earnings report in February led to a record loss of $230 billion in market value
Amid a major rebrand and shake-ups to its business model, Meta experienced a historic nosedive in value earlier this year – and investors are bracing for another difficult quarter.
After a discouraging earnings report in February, in which it disclosed that Facebook had recorded its first-ever drop in daily user numbers, Meta lost a record $230bn in market value.
Principal analyst at market research firm Insider Intelligence, Debra Williamson said that although investors will be keenly watching Meta’s first-quarter report on Wednesday for signs of recovery, a “full turnaround is not expected”. She stated:
“It is going to be slow progress for Meta after its massive stock decline last quarter. But we – and advertisers in particular – are hoping to see some progress.”
Meta’s struggle was not entirely unforeseen: Mark Zuckerberg, chief executive officer, had cautioned that new privacy rules from Apple could cost the company $10bn in lost sales this year. The regulations have led the company to shift some of its core advertising business models and prevented Meta from collecting certain user data.
One such shift is putting significant emphasis on Reels, its short-form video content that it has yet strained to monetize. In last quarter’s report, the company cautioned that these issues could continue to affect year-over-year growth in the first quarter of 2022.
The CFO, David Wehner, said in a guidance statement:
“We expect continued headwinds from both increased competition for people’s time and a shift of engagement within our apps towards video surfaces like Reels, which monetize at lower rates than Feed and Stories.”
In an effort to retain young users – a key advertising demographic that has been exiting Instagram and Facebook in droves – Meta turned to video. Documents leaked by the company whistleblower Frances Haugen have shown that the age group provides 97% of Meta’s revenue but is being drawn to competitors like TikTok.
Although Meta has a “formidable competitor in TikTok”, it has yet to create a sustainable business model in response, said Williamson.
“They said last quarter they were going to figure out how to better monetize Reels. This quarter, we are looking for signs that it is actually happening.”
The Metaverse, the company’s proprietary virtual reality platform, is meanwhile draining large amounts of funding from core businesses such as Facebook and Instagram. Last year alone, Meta channeled $10bn in funding into the platform – more than 10 times what it paid to obtain Instagram in 2012.
Raj Shah, an analyst at consultancy firm Publicis Sapient said the Metaverse faces a long road to profitability. A critical mass of users is often required for successful monetization — Facebook, for instance, has nearly 3 billion. However, its Metaverse brand Horizon World currently has just 30,000 globally.
“We see no reason to believe that this quarter for Meta will be significantly different than last. Meta has announced new monetization schemes for its Metaverse investments, but adoption is still low.”
User numbers hold high priority to Meta’s success – and its Facebook platform’s first-ever loss in users was one of the most impactful takeaways from its 2021 fourth-quarter report. Williamson said Meta’s biggest short-term challenge is to stop the decline in usage, which was emphasized by that loss.
“This was a wake-up call to the market and also to the advertising community that this is a platform that is flattening – it is not the sexy, bright shiny object anymore.”
Martin Garner, COO at market research firm CCS Insight said bans of Meta products in Russia – where it had millions of users – amid its ongoing war with Ukraine, will probably further hit user numbers. Citing Meta as an “extremist organization”, the country blocked Instagram and Facebook in March.
“With next week’s results we expect Meta to continue its run of challenging quarters.”