Facebook shares tank as it pivots towards unproven metaverse strategy

Despite a 20% Q4 revenue hike, stock in tech giant Meta/Facebook dropped 20% amid negative outlook for the next quarter.

Meta posted $33.67 billion in revenue for Q4 2021, up 20% year-on-year. This would be a win were it not for the fact it has spent a significant amount of money this year investing in new business units, particularly around the metaverse. Total overheads were $21 billion, up from $15 billion the previous year – a 29% increase.

This meant net income was $10,285 billion compared to $11,219 billion for the quarter, operating margin was 37%, down from 46% a year ago, and diluted earnings per share landed at $3.67, compared to $3.88 – which was lower than anticipated. The bottom line is the firm lost some profitability in the quarter despite a revenue hike.

Then there’s the outlook. The firm expects first quarter 2022 total revenue to be in the range of $27-29 billion – lower than widely reported analyst consensus expectation of $30 billion. Meta’s CFO outlook commentary stated it expects Q1 2022 to be impacted by ‘headwinds’ to both impressions and price growth.

“On the impressions side, 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,” said the commentary.

On the pricing side, it also foresees trouble ahead: “First, we will lap a period in which Apple’s iOS changes were not in effect and we anticipate modestly increasing ad targeting and measurement headwinds from platform and regulatory changes.

“Second, we will lap a period of strong demand in the prior year and we’re hearing from advertisers that macroeconomic challenges like cost inflation and supply chain disruptions are impacting advertiser budgets. Finally, based on current exchange rates, we expect foreign currency to be a headwind to year-over-year growth.”

So user behaviour on the whole is trending away from its more profitable bits of its platforms, while competition from rivals is hotting up. And then it also foresees ad spend declining because of wider economic factors.

This negative outlook, combined with the drop in profitability, led to the tanking of Meta’s share price, and what is being reported as a wipe of about $200 billion from its market value.

Meanwhile it looks like the user base is plateauing. The financial report logs these in a slightly slippery way, but even by its metrics of 1.93 billion ‘daily active users on average for December 2021’ is flat on what it reported in the previous quarterlies – ‘1.93 billion on average for September 2021’. It’s actually being reported more granularly as Facebook’s first ever user base drop, so there may be some rounding up going on.

Regardless of whether it’s a very slight proportional drop or a flatline, it’s a grim landmark for a firm whose strength was for so long tied up with its meteoric platform growth. If we are looking at the apex of its core user base, it’s logical to assume that the trend is downwards. Perhaps not by a lot, but the days of an ever expanding user base which has historically fuelled investor interest in Facebook may be over.

Perhaps this explains some of its recent activity. Zuckerberg et all may well have concluded if they’ve hit the bottom of the well in terms of user growth on traditional social media then the move is to pivot – quickly and expensively – into something new. And the newest, trendiest thing on the shelves at the moment is the metaverse.

In the release the CEO stated: “I’m encouraged by the progress we made this past year in a number of important growth areas like Reels, commerce, and virtual reality, and we’ll continue investing in these and other key priorities in 2022 as we work towards building the metaverse.”

Facebook has spent the last year or so making a big splash of its metaverse offering, even going so far as changing its name to Meta. It’s not alone of course – all the tech giants are getting in on it.  Microsoft indulged in some serious M&A recently  with the acquisition of Activision Blizzard, a move that has been touted as fuel for its metaverse ambitions – but it didn’t change its name to Meta-soft. Facebook seems particularly focussed on being, or being seen to be, at the centre of this new technology area.

But the metaverse is not proven and it’s not even particularly well defined. The degree to which the company is able to do both as it spins up its new platforms and its traditional user base peaks will surely dictate investor confidence in the future.