Meta experienced an historic drop in value earlier this year amid a major rebrand and restructuring of its business model — and investors are bracing for another tough quarter.
Meta lost a record $230 billion in market value after a disappointing earnings report in February that revealed Facebook had seen its first-ever drop in daily users.
While investors will be anxiously watching Meta’s first-quarter earnings report on Wednesday for signs of a recovery, a “full turnaround is not expected,” said Debra Williamson, chief analyst at market research firm Insider Intelligence.
“After the massive stock decline last quarter, progress for Meta will be slow,” she said. “But we — and advertisers in particular — are hoping for progress.”
Meta’s fight was not entirely unexpected: Chief Executive Officer Mark Zuckerberg had warned that Apple’s new privacy rules could cost the company $10 billion in lost sales this year. The regulations prevent Meta from collecting certain user data and have prompted the company to change some of its core advertising business models.
Such a shift puts a significant emphasis on Reels, its short video content that it has yet to monetize. The company warned in its most recent quarterly report that year-over-year growth in the first quarter of 2022 could continue to be impacted by these issues.
“We anticipate continued headwinds from both increased competition for people’s time and a shift in engagement within our apps to video interfaces such as Reels, which are monetized at lower rates than Feed and Stories,” CFO David Wehner said in a statement .
The shift from meta to video represents an attempt to retain young users — a key advertising demographic that has been leaving Facebook and Instagram in droves. The age group accounts for 97% of Meta’s revenue, documents from company whistleblower Frances Haugen have shown, but is being lured in by competitors like TikTok.
Meta has an “impressive competitor in TikTok,” Williamson said, and has yet to develop a sustainable business model in response. “They said last quarter that they were figuring out how to better monetize reels,” she said. “This quarter we’re looking for signs that it’s actually happening.”
Meanwhile, the company’s proprietary virtual reality platform, Metaverse, is siphoning large amounts of cash from core businesses like Facebook and Instagram. Meta has injected $10 billion in funding into the platform in 2021 alone — more than 10 times what it spent on acquiring Instagram in 2012.
The Metaverse faces a long road to profitability, said Raj Shah, an analyst at consulting firm Publicis Sapient. Successful monetization often requires a critical mass of users – Facebook, for example, has almost 3 billion. But his Metaverse brand, Horizon World, currently only has 30,000 worldwide.
“We see no reason to believe that this quarter will be materially different for Meta than last,” he said. “Meta has announced new monetization programs for its Metaverse investments, but adoption is still low.”
User numbers are critical to Meta’s success – and a historic loss of users on its Facebook platform was one of the most impactful takeaways from the fourth-quarter 2021 report. This loss underscored that Meta’s biggest short-term challenge is managing the decline in usage contain, Williamson said.
“This was a wake-up call to the market and also to the advertising community that this is a platform that’s flattening out — it’s not the sexy, bright shiny object anymore,” she said.
User numbers are likely to be hit further by bans on meta products in Russia — where it was home to millions of users — amid the ongoing war with Ukraine, said Martin Garner, COO of market research firm CCS Insight. The country blocked Facebook and Instagram in March, calling Meta an “extremist organization”.
“With next week’s results, we expect Meta to continue its string of challenging quarters,” he said.