The parent company of Facebook, Meta Platforms, is making a massive investment in virtual reality, but its actual reality is shaping up to be a complete disaster.
Following an earnings release that a Wall Street analyst described as a “train wreck,” Meta shares plummeted 24% on Thursday to their lowest point in nearly four years. It’s a big cry from the company’s posture a little over a year ago, when CEO Mark Zuckerberg announced with great fanfare on October 28, 2021, that Facebook will change its name to Meta Platforms to emphasize its focus on the “metaverse.”
In September 2021, Facebook’s market value achieved its all-time high, surpassing $1 trillion. As advertisers raced to Facebook and Instagram to access their billions of users, revenue and profits increased.
Certainly, the tech industry as a whole has taken a battering this year, but Meta’s stock decline has far outperformed the broader sector, with its shares down 67% from a year ago compared to the tech-heavy Nasdaq’s 31% decline during the same period. Approximately $700 billion in market value have been wiped off by Meta’s precipitous decline.
The market value of Meta decreased to $268 billion on Thursday, from over $1 trillion in September 2021.
The company’s difficulties raise doubts about its all-in wager on the metaverse and whether the social media giant will suffer the same fate as other prominent corporations whose future wagers were unsuccessful. As the economy slows and advertisers reduce spending, Meta’s core Facebook business faces difficulties in the near future.
Wedbush analyst Dan Ives wrote in a research, “Meta’s numbers last night were an unmitigated train wreck, indicating widespread digital advertising doldrums ahead for Zuckerberg & Co. as they place a dangerous and perplexing wager on the metaverse.”
Here are three major factors weighing on Meta’s stock price and raising doubts about its long-term prospects.
$9.4 billion in metaverse losses
During a conference call on Wednesday to discuss Meta’s most recent earnings, Zuckerberg told investors that he is “very sure” that the company is headed in the right path.
Investors are not persuaded. The corporation is placing a colossally costly wager on its capacity to evolve into a virtual reality juggernaut and on the viability of that technology to fuel the next phase of Meta’s development.
Although such strategic shifts can take years to execute for large corporations, as IBM and Microsoft demonstrated when they transitioned from selling hardware to software, the early returns for Meta have been dismal. During the first nine months of the year, Reality Labs, Meta’s metaverse division, lost $9.4 billion. The business announced on Wednesday that it anticipates “substantially” larger operating losses for the division in 2023.
Investors are sceptical since customers have not exactly flocked to the nascent metaverse thus far. Wall Street values companies based on near-term returns, as opposed to hazy estimates that extend years into the future, in contrast to Silicon Valley’s longer timeframes for establishing enterprises.
Horizon Worlds, Meta’s new virtual environment, lowered its aim for monthly active users from 500,000 to 280,000, but the place is attracting fewer than 200,000 users per month, according to a Wall Street Journal article published earlier this month.
Angelo Zino, senior equity analyst at CFRA Research, said investors in a research report, “[I]nvestors should remain on the sidelines as it will be many years before the metaverse’s advances can be truly monetized.”
Slower Facebook expansion
Comparatively, Facebook averaged 1.98 billion daily active users in September, a 3% rise from the previous year.
That may seem reasonable, but it pales in comparison to Facebook’s explosive expansion in earlier years. Facebook said in February that it had lost users for the first time in its history, so the slower growth is not surprising.
The social media juggernaut, a major source of revenue for Meta, faces competition from upstarts such as TikTok, which is attracting younger consumers.
Advertising challenges
The advertising money generated by Facebook, Instagram, and WhatsApp is Meta’s lifeblood, as businesses are eager to access their billions of daily users. However, its ad income decreased by 3.7% in the most recent quarter, adding to investor fears.
03:00 Meta declares a hiring freeze, foreshadowing a tech slowdown.
Regarding advertisements, Meta suffers a double whammy. As a result of the economic recession, advertisers are slashing expenditure, with the corporation citing a “uncertain and turbulent macroeconomic picture” for commercials on Wednesday. Additionally, the corporation is wrestling with the repercussions of Apple’s privacy restrictions for programs that operate on its devices. This modification allows users to request that apps not follow them, and Facebook estimates that it will cost the company $10 billion this year.