Mark Zuckerberg (pictured above) might want us all to live in the metaverse, but in the real world Facebook parent Meta's [FB] share price is tanking.
After a disastrous fourth quarter earnings report Meta’s, the company formerly known as Facebook, share price plunged over 26% in Thursday’s session. The fallout led to US markets experiencing their worst day of trading in almost a year, with the S&P 500 falling 2.4% and the tech-heavy Nasdaq slipping 3.7%.
Competition from rivals means the social media side of the business could be facing serious long-term challenges to its business model. while substantial investment in the metaverse isn’t likely to pay off anytime soon.
Should investors be picking up the stock while it’s cheap, before the firm begins to capitalise on its potential market advantages? Or is the drop in value - and tech stocks in general - something that is going to continue?
Facebook’s share price hit by earnings
There’s no getting away from the fact that Meta has been punished. Over a 12 month timeframe, the stock is down over 11%. Narrowing that timeframe down to 1 September, when the stock traded at $381.5, to Friday’s close of $237.09, Facebook’s share price has fallen almost 38%.
Fourth quarter earnings dealt a further dent in Meta’s stock fortunes. Earnings per share came in at $3.67, missing the expected $3.83, on revenue of $33.7bn. For the current quarter, Meta said that revenues were likely to fall short of Wall Street expectations due to ‘increased competition’ - ie TikTok. For the first quarter Meta said revenue will be $27 billion to $29 billion, Wall Street had expected $30 billion.
Meta's Q1 revenue forecasts are below Wall Street's $30bn expectations
In the battle for attention, Meta isn’t winning. Monthly active users came in flat at 2.91bn, missing the expected 3bn. The company blamed a shift in how people engage with the platform, saying that users were increasingly interested in short form videos that deliver less revenue than newsfeed ads.
Perhaps the biggest headache is changes in Apple’s [AAPL] privacy policies that reduce the information companies can access from iPhone users to deliver highly targeted ads. Meta said that the change would cost $10bn in sales in 2022.
“We believe the impact of iOS overall is a headwind on our business in 2022,” Meta CFO Dave Wehner said on a call with analysts after the company’s fourth-quarter earnings report. “It’s on the order of $10 billion, so it’s a pretty significant headwind for our business.”
Will the metaverse pay off?
Zuckerburg has made a big deal about the metaverse, going as far as rebranding his whole company around the still hazy concept. And fourth quarter earnings were the first time that investors got a glimpse of the numbers involved, with Meta breaking out sales from its virtual and augmented reality businesses. In the quarter, Meta Reality Labs brought in $877m, and while that was up from $717m the previous year, the division lost $3.3bn, a steeper loss than last year’s $2.2bn loss.
For the full year, Meta Reality Labs, which includes sales of the Oculus VR headsets, increased revenue from $1.2bn in 2020 to $2.2bn in 2021. While sales were increasing, so were operating losses, with the VR and AR side of Meta losing $10.2bn last year, up from 2020’s $6.6bn, and 2019’s $4.5bn.
Meta Reality Labs Q4 2021 losses, up from $2.2bn the year before
Those losses need to be put into context. Yes, it’s over $10bn and has been growing over the past few years. However, executives at Facebook have said that they don’t expect to realise their metaverse vision for more than a decade. Over the next five years, Meta is expected to create 10,000 jobs in the EU alone as it delivers its vision for the metaverse. Hiring includes engineering and acquiring game studios to create an online world.
So while costs are likely to weigh on earnings, investors have been forewarned. Meta also has the funds to invest. Despite the horror show of the fourth quarter earnings, the company is still grotesquely profitable. For those convinced that Meta will play a key role in the metaverse, now could be a buying opportunity.
The wider picture
The pandemic led to huge share price growth in tech companies like Meta, Netflix [NFLX] and PayPal [PYPL]. Having experienced quadruple growth in share prices, these stocks have plummeted back to earth in 2022. Reasons include hikes in interest rates and slowing growth as lockdown restrictions end. Weak earnings guidance has done little to appease investor sentiment.
PayPal has been one of the worst performers. So far this year the online payments provider’s stock is down 30%, with a warning that a weaker e-commerce environment would lead to slower growth. Earlier in January, Netflix’s share price plunged after it missed earnings guidance.
This shouldn’t obscure the fact that this earnings season has been good for tech companies. Amazon, Apple and Microsoft have all delivered robust earnings.
In Meta’s case, investors thinking of buying the dip should weigh up whether the current price represents a bargain, especially if the metaverse acts as a long-term tailwind, or if there’s still some downside left in the stock.
Among the analysts tracking the stock on Yahoo Finance, Facebook’s share price has a $353.91 price target - suggesting a 49.2% upside on Friday’s close.