Facebook (Meta) plummets on earnings disappointment

Facebook (Meta) shares were decimated on Wednesday night after reporting weak earnings and laying out a mountain of challenges ahead. While some of the more obviously speculative names have been returned to value by the market, this is the first tech titan to really face the market's wrath.

$200 billion was wiped from FB’s valuation in 27 brutal minutes and there was no respite on the open. If the loss sticks, it’ll be the biggest single day loss of company value in history.

The Key Metrics

• Earnings per share: $3.67 vs $3.84 expected
• Revenue: $33.67 billion vs $33.4 billion expected
• Daily Active Users (DAUs): 1.93 billion vs 1.95 billion expected
• Monthly Active Users (MAUs): 2.91 billion vs 2.95 billion expected
• Average Revenue per User (ARPU): $11.57 vs $11.38 expected
• (Forecasts via Refinitiv & Street Account)

Two key misses to focus on: Earnings & Active Users

The continuing change in the growth story is a real dilemma. If this was just one quarter of slightly lower profits, it could be explained away by a charismatic CEO…

However, concerns over peak user growth have been noted for a while now. Average Revenue Per User actually. Theoretically fewer active users would make little difference to the bottom line as long as it’s balanced by an increase in monetisation.

That’s not likely to be the case:

“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,”

Hard to find anything positive in that statement. Increased competition for “attention” (which is essentially the commodity that all social media firms trade in) from competitors such as TikTok can’t be good. There’s no way to put a positive spin on a change in consumer behaviour to products that are harder to monetise either.

Zuckerberg still sees potential with Reels however:

“Over time we think that there is potential for a tremendous amount of overall engagement growth. We think it’s definitely the right thing to lean into this and push hard to grow Reels as quickly as possible and not hold on the brakes at all, even though it may create some near-term slower growth than we would have wanted.”

Then there’s the iOS impact. Apple’s privacy changes have made it harder for brands to target their advertising on Facebook & Instagram.

Chief Financial Officer Dave Wehner said: “We believe the impact of iOS overall is a headwind on our business in 2022, on the order of $10 billion,”

And this won’t just affect Facebook. Shares in social media platforms including Snap, Twitter & Pinterest, all fell in after hours trade.

Facebook/Meta also forecasts revenue for Q1 2022 will hit $27 billion to $29 billion, compared with the $30.3 billion Refinitiv analysts estimated on average.

Disappointment across the board. The current business model is being called into question at the same time as the company moves into a risky, unproven model certainly. It suggests a rocky road ahead.

Nonetheless, Zuckerberg remained positive:

"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,"

Not investment advice. Past performance does not guarantee or predict future performance.