These aren't exactly salad days for Facebook-parent Meta Platforms. In fact, one could argue the social media giant is past its peak, as Meta stock has lost more than half its value since September.
To start, virtually all revenue for Meta comes from advertising, which currently is declining and shifting. Plus, the company's next big thing — the metaverse — is a decade or more away from attaining stature.
On top of that, the company has to manage numerous other daunting challenges. They include increased competition and losses in user tracking. That's in addition to a threatening regulatory environment.
All of these issues have come into focus in the last few days. For the first time in its 18-year history, the company previously known as Facebook showed its first quarterly revenue decline when it reported second-quarter results July 27. That pushed Meta stock down 5.2%.
It all begs the question: Are there any good reasons to buy or hold Meta stock?
Meta Stock: Waiting On The Sidelines
"We recommend investors remain on the sidelines while Meta assesses several structural valuation risks including consumer behavior shifts, competition, moat degradation, regulatory risks and Metaverse investment risks," Needham analyst Laura Martin wrote in a note to clients after Meta reported earnings.
Martin thinks that forward-looking estimates on Meta's performance are too high. She notes the company plans on investing more than $10 billion in creating the metaverse. It's a radically new form of communicating that's a long way off.
The metaverse combines virtual and augmented reality technology to create a synthetic world. In it, users roam about, represented by a virtual figure known as an avatar.
Martin estimates that metaverse investments by the company will lose more than $20 billion in 2022. That's up from $10 billion in 2021.
"This will climb to more than $30 billion in 2023, by our estimate," the analyst said.
"Meta talks about the returns on its Metaverse investments in terms of 2030, well beyond most investor time frames," Martin added. "There is no need to be in Meta today if its current investments will pay off in 2030. Also, if the world changes during that period, they may never pay off."
Second-Quarter Results Fall Short
For its second quarter, Meta reported adjusted earnings of $2.46 a share, down 32% from the year-ago period. Revenue of $28.8 billion fell by about 1%, missing estimates on the top and bottom lines.
"Our main take-away from the numbers and the earnings call was that the main issue facing the firm is a potential downturn in the economy," Meta stock analyst Ali Mogharabi of Morningstar wrote in his note to clients. "The firm's first year-over-year revenue decline indicates demand is slowing, reflecting economic uncertainty, the impact of Apple's data privacy changes, and increasing competition."
For its third quarter, Meta expects revenue in the range of $26 billion to $28.5 billion. That's below FactSet estimates of $30.4 billion.
"The outlook reflects a continuation of the weak advertising demand environment we experienced throughout the second quarter, which we believe is being driven by broader macroeconomic uncertainty," Meta Chief Financial Officer David Wehner said in written remarks with the Meta earnings release.
Revenue Declines Due To Apple
Meta continues to see revenue declines due to Apple changing its iPhone operating system to reduce ad tracking, which is something Google-parent Alphabet said it intends to do down the road.
More than 95% of Meta's revenue come from mobile devices, which are controlled by Apple and Google, via Android. Apple's decision to give users more privacy might cost Meta $10 billion in lost revenue this year. If Google also moves in that direction, it could have a similar impact.
Among its other troubles, Meta remains under pressure over allegations of antitrust from Congress. Further, Chief Operating Officer Sheryl Sandberg is leaving the company. She was instrumental in growing Meta's advertising business over the past 14 years.
There have also been consumer behavior shifts that hurt Meta. During the pandemic, consumers shifted toward video platforms like TikTok and YouTube. They also streamed more video games.
Meta Stock: Gen Z Looks Elsewhere
This is especially true of Generation Z, consumers roughly in the 10-25 age group and highly coveted by advertisers. Today, Gen Z users network across an array of other apps.
This includes Amazon-owned Twitch for livestreaming and gaming, Discord for private chat groups, BeReal for spontaneous updates, and Poparazzi for photos of friends. Increased competition also comes from Snap, Pinterest, Etsy and Twitter.
Of course, Meta has not been sitting idly with all the competitive pressure creeping in.
For example, its development of Reels is Facebook's response to TikTok. It's investing heavily in artificial intelligence in order to increase the usage of its various platform such as Instagram. And it's developing new technologies to boost advertising and sales.
Unlocking Hundreds Of Billions In Revenue
"We're focused on making the long-term investments that will position us to be stronger coming out of this downturn, including our work on our discovery engine, Reels, our new ads infrastructure, and the metaverse, and we're also focused on being rigorous about measuring returns and sizing these investments correctly," Chief Executive Mark Zuckerberg said in the post-earnings conference call with Meta stock analysts.
"Given some of the product and business constraints that we face now, I feel even more strongly that developing these platforms will unlock hundreds of billions of dollars, if not trillions over time," Zuckerberg said.
"This is obviously a very expensive undertaking over the next several years," he went on to say. "But as the metaverse becomes more important in every part of how we live from our social platforms and entertainment to work and education and commerce, I'm confident that we're going to be glad that we played an important role in building this."
The question is, will investors have the patience to wait on Meta stock. It also begs the question: Is the sun setting on the glory years for Facebook and Meta stock?
Meta stock, which has collapsed 57% from its record high of 384.33 set on Sept. 1, was up 3.8%, near 165.10, during afternoon trading on the stock market today.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
