Peter Thiel has announced his intention to step down as a director of Meta [FB], Facebook’s parent company, at its annual shareholders' meeting to be held in May. The loss of one of its earliest investors is the latest blow to the Meta share price, which is battling a perfect storm of headwinds, including privacy changes and users abandoning the social media site.
Just last week, chairman and CEO Mark Zuckerberg threatened to shut Facebook and Instagram down in Europe if the EU didn’t allow Meta to transfer, store and process data from European users on US servers.
Of more immediate concern for the Meta share price is Apple’s App Tracking Transparency framework and its Identifier for Advertisers policy, which allows iOS users to opt out of having apps track them across the web.
Meta CFO David Wehner warned that not being able to collect advertising data is set to cost the company $10bn in revenue in fiscal 2022 as a result of the privacy changes. “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 the platform and regulatory changes,” Wehner said on the company’s fourth-quarter earnings call on 2 February.
Earnings cause Facebook stock to slide
Meta’s Q4 2021 report was the first since the company’s strategic rebrand, and it made for disappointing reading. Despite total revenue of $33.67bn beating the analyst consensus of $33.4bn, according to Refinitiv, earnings were $3.67 per share, missing the $3.84 expected. Meta also missed analyst estimates for daily active users and monthly active numbers. The number of total users declined for the first time in the company’s 17-year history.
Meta also admitted that Instagram’s Reels feature was facing stiff competition from its rivals, namely TikTok. Investor concerns that Facebook’s user growth is stagnating hammered the Meta share price following the earnings announcement. The stock dropped 26% on 3 February, wiping $230bn from Meta’s share value – the biggest one-day plunge on record for a US company. Since the start of the year, through to its 11 February closing price of $219.55, the Meta share price is down 34%. The Facebook stock recorded a 52-week low of $216.15 on 8 February.
To make matters worse, Meta also reported a decline in profit as a result of its decision to shift focus to investment in augmented and virtual reality to help it build the metaverse. Its Reality Labs division saw a $3.3bn loss in Q4 2021 and more than $10.19bn in fiscal 2021, up from $6.62bn in fiscal 2020.
Advertising could drag metaverse ambitions down
Facebook’s seemingly waning popularity has raised questions about Zuckerberg’s metaverse bet. Should Meta be pouring money into something that is unproven?
In an analysis of the earnings, Hargreaves Lansdown analysts said that the company has “got deep pockets” and is in a position to be able to invest billions of dollars to realise its metaverse ambitions. But it’s too early to say whether the strategy will pay off.
“We’d like some specific steer on exactly how the metaverse is going to work. It’s a good idea in principle and, if successful, could see marketers prepared to part with even more money for the data Facebook’s users leave behind,” they wrote. “The investment needed to get this project to fruition is dependent on advertising growth staying spritely.”
For investors who are excited by what the metaverse could offer, the recent pullback in the Meta share price could present a buying opportunity. Yet there’s plenty of risk in the short term.
JPMorgan has long been bullish on Meta but downgraded its rating for Facebook’s stock – for the first time ever following Q4 2021 earnings – from ‘overweight’ to ‘neutral’. In a note to clients seen by Bloomberg, analyst Douglas Anmuth said in regard to persisting advertising headwinds: “We move to the sidelines as we believe shares will be under further pressure or range-bound in the coming month.” Anmuth cut his target for the Meta share price from $385 to $284, which implies an upside of 29% from the 11 February closing price.
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