6 reasons why Meta is in trouble

Meta, the company formerly known as Facebook, suffered its biggest single-day annihilation on Thursday, as its stock fell 26% and its market value fell more than $230 billion.

Its crash followed a dismal earnings report on Wednesday, when chief executive Mark Zuckerberg explained how the company was navigating a delicate transition from social media to the so-called virtual world of the metaverse. On Thursday, a company spokesperson reiterated statements from its earnings announcement and declined to comment further.

Here are six reasons why Meta is in a tough spot.

User growth has reached a ceiling.

The salad days of wild Facebook user growth are over.

Even though the company reported modest gains in new users on Wednesday in its so-called family of apps that includes Instagram, Messenger and WhatsApp, its main social networking app Facebook lost around half a million users over the course of the year. fourth quarter compared to the previous quarter.

It’s the first such decline for the company in its 18-year history, during which time it had virtually defined itself by its ability to attract more new users. The drop signaled that the main app may have peaked. Metas’ quarterly user growth rate was also the slowest in at least three years.

Metas executives pointed to other growth opportunities, such as activating the money tap at WhatsApp, the messaging service that has yet to generate substantial revenue. But these efforts are nascent. Investors are likely to consider next whether other Metas apps, such as Instagram, might start to peak in user growth.

Changes to apples limit Meta.

Last spring, Apple introduced an App Tracking Transparency update to its mobile operating system, essentially giving iPhone owners the choice to let apps like Facebook monitor their online activities. These privacy measures have now harmed Metas’ business and will likely continue to do so.

Now that Facebook and other apps have to explicitly ask people for permission to track their behavior, many users have opted out. This means less user data for Facebook, making ad targeting one of the company’s biggest money-makers.

What’s doubly painful is that iPhone users are a far more lucrative market for Facebook advertisers than, say, Android app users. People who use iPhones to access the Internet typically spend more money on products and apps offered to them from mobile ads.

Meta said Wednesday that Apple’s changes will cost it $10 billion in revenue over the next year. The company railed against Apple’s changes and said they were bad for small businesses that rely on social media advertising to reach customers. But Apple is unlikely to reverse its privacy changes, and Metas shareholders know it.

Google steals online ad share.

Metas’ troubles have been the good fortune of its competitors.

On Wednesday, David Wehner, chief financial officer of Metas, noted that as Apple’s changes have given advertisers less visibility into user behaviors, many have started shifting their advertising budgets to other platforms. Namely Google.

On Google’s earnings call this week, the company saw record sales, particularly in its e-commerce search advertising. This is the exact same category that tripped up Meta over the last three months of 2021.

Unlike Meta, Google does not rely heavily on Apple for user data. Wehner said Google likely has a lot more third-party data for measurement and optimization purposes than the Metas advertising platform.

Wehner also pointed to Google’s agreement with Apple to be the default search engine for the Apple Safari browser. This means Google’s search ads tend to appear in more places, collecting more data that can be useful to advertisers. This is a huge problem for Meta in the long run, especially if more advertisers switch to Google search ads.

TikTok and Reels present a conundrum.

For more than a year, Mr. Zuckerberg has pointed out what a formidable enemy TikTok is. The China-backed app has grown to over a billion users thanks to its highly shareable and weirdly addictive short video posts. And it competes fiercely with Metas Instagram for eyeballs and attention.

Meta has cloned TikTok with a video product feature called Instagram Reels. Zuckerberg said Wednesday that Reels, which is prominent in people’s Instagram feeds, is currently the main engagement driver in the app.

The problem is that while Reels attracts users, it doesn’t make money as effectively as other Instagram features like stories and the main feed. That’s because it’s slower to make money from video ads because people tend to skip them. This means that the more Instagram pushes people to use Reels, the less money it can make for those users.

Mr Zuckerberg compared the situation to a similar time several years ago when Instagram introduced its Stories feature, which was a Snapchat clone. This product also didn’t make that much money for the company when it first debuted, although ad dollars eventually followed. Yet, there is no guarantee that Instagram Reels can repeat this magic.

Spending on the metaverse is crazy.

Mr. Zuckerberg believes so much that the next generation of the Internet is the metaverse, a still fuzzy and theoretical concept that involves people moving through different virtual and augmented reality worlds that he is willing to spend big on it.

So big that spending was over $10 billion last year. Mr. Zuckerberg expects to spend even more in the future.

However, there is no evidence that the bet will pay off. Unlike Facebook’s move to mobile devices in 2012, VR usage is still the domain of niche hobbyists and has yet to really break into the mainstream. Popular augmented reality headsets are also months or even years away.

Essentially, Mr. Zuckerberg is asking employees, users, and investors to trust him and his vision for the metaverse. It’s a big ask for something that will cost the company billions in years to come and may never come to fruition.

The specter of antitrust hovers.

The threat of Washington regulators coming to Mr. Zuckerberg’s company is a headache that just won’t go away.

Meta faces multiple investigations, including from a newly aggressive Federal Trade Commission and several state attorneys general, into whether it acted anticompetitively. Lawmakers have also coalesced around congressional efforts to pass antitrust bills.

Mr. Zuckerberg argued that Meta is not a social media monopoly. He furiously pointed to what he calls unprecedented levels of competition, including from TikTok, Apple, Google and other future adversaries.

But the threat of antitrust action has made it harder for Meta to navigate new social media trends. In the past, Facebook bought Instagram and WhatsApp with little control as these services gained billions of users. Now even some of Metas’ seemingly less controversial acquisitions in virtual reality and GIFs have been disputed by regulators globally.

With deals being less likely, it’s up to Meta to innovate to overcome any challenges.

In the past, Mr. Zuckerberg could have benefited from doubt about his ability to do so. But on Thursday at least, faith was rare on Wall Street.