A rare decline in profit in the three months to the end of December led to billions being wiped off Meta Platform’s [FB] valuation in early February. While revenue grew 20% to $33.67bn, the company reported that it lost daily users for the first time ever.
The profit decline comes at a time when the owner of Facebook has been investing heavily in augmented and virtual reality technology and infrastructure. Its CEO Mark Zuckerberg has admitted that the metaverse is at least a decade away from being fully realised. While the virtual worlds of the future will potentially be a lucrative business opportunity, the fact that it will be years before the strategy shift has a material impact on revenue means there will be some investors that aren’t convinced by the company’s big bet.
Analysts at Hargreaves Lansdown believe that Meta’s ambitions to be a key player in the metaverse have done little to “quell the fear” of investors. “Usership growth is slowing and advertising revenue is in for a period of stagnation amid inflation. That raises questions about Meta’s competitive position in the face of mushrooming rivals like TikTok,” analysts at the firm commented in a note following the company’s Q4 2021 earnings release in February.
EU regulations could become a headwind
The Facebook share price might have climbed 8% in the past month to $227.85 on 30 March, but the stock remains down 32.3% since the start of 2022. It’s also some way off its all-time high of $384.33 recorded on 1 September last year.
Shares in Facebook could come under increasing pressure, at least in the near term. Towards the end of March, the European Union agreed on the wording for its Digital Markets Act (DMA), which is designed to ensure that tech giants cannot abuse their position and act as ‘gatekeepers’ to users.
A company qualifies as a gatekeeper if it has generated at least €7.5bn in annual revenue in the EU in the last three years or has a valuation of at least €75bn. It also needs to meet criteria of having at least 45 million monthly users and 10,000 business users in EU member states.
How will the regulations impact Facebook products?
The repercussions of the DMA Act essentially mean that Facebook will have to allow its products and services to be integrated with those of third parties. For example, WhatsApp will have to allow users to be able to communicate with people using alternative messengers such as Apple’s [AAPL] iMessage service. The DMA will also limit targeted advertising without consent.
The aggressive rules are forecast to become effective by the end of 2022. Any company found guilty of breaking the regulations could be slapped with a fine of up to 10% of its global revenue. A repeat offence could result in a fine double that.
It’s too early to say how the rules will affect shares in Facebook, but the EU regulating big tech to ensure fair competition could end up being a headwind that the stock will have to battle against over the coming quarters. Investors will likely be keeping a close eye on how this impacts user growth and average revenue per user.
Where Facebook’s shares go from here is also likely to be determined by its Q1 2022 earnings report in May. A further decrease in daily users and a fall in profit could see the company’s share price take another tumble.
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