Why the Facebook owner’s shares are in freefall

Mark Zuckerberg’s social media empire felt the full force of investors’ concerns about its growth prospects on Wednesday, as the revelation of Facebook’s first-ever drop in daily users helped trigger a share price rout.

It was the first set of quarterly results for the parent company of Facebook under its new name, Meta. Here are some key points to take away from the figures and why Meta’s stock fell 20% in after-hours trading.

Mark Zuckerberg seen on a TV screen announcing the company’s new name, Meta
Mark Zuckerberg announces the company’s new name, Meta, in October 2021. Photograph: Eric Risberg/AP

Declining user numbers at Facebook

Facebook is Meta’s biggest app and it recorded its first fall in daily active users – a key growth metric – since the company was founded in 2004. Page 13 of this slide deck shows what happened: global daily users dropped from 1.93 billion in the third quarter of 2021 to 1.929 billion. It was led by a decline in users in Africa and Latin America, which is worrying for Meta because it needs to grow outside of its main market in the US, where growth fell too, albeit not for the first time.

Last year a whistleblower, Frances Haugen, released internal documents that included presentations warning that Facebook was losing young users. One document revealed that “engagement is declining for teens in most western, and several non-western, countries”.

TikTok seen on a smartphone
TikTok is proving to be a tough rival to Meta apps. Photograph: Mateusz Słodkowski/SOPA Images/Rex/Shutterstock

TikTok is a problem

Zuckerberg, Meta’s founder and chief executive, identified the video-sharing app TikTok as a key contributor to the user growth problem. “People have a lot of choices for how they want to spend their time, and apps like TikTok are growing very quickly,” he said on Wednesday’s earnings call. Chinese-owned TikTok has 1 billion users worldwide and is one of the reasons why Meta is struggling to compete in the market for young consumers.

On the call, Zuckerberg said he was hopeful Facebook’s rival to TikTok, Reels, would help win back young users. “This is why our focus on Reels is so important over the long-term, as is our work to make sure that our apps are the best services out there for young adults.” In the meantime, however, it means slower revenue growth, he admitted.

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Hits to revenue growth

Meta makes 97% of its revenue from advertising, by building up profiles of its users that can then be matched to advertisers’ needs. So if an advertiser is looking for a consumer in a certain location, of a specific demographic and with certain hobbies, then Meta can direct those ads towards particular groups thanks to the data it has compiled about them.

Meta, which also owns Instagram and WhatsApp, saidrecent changes with Apple’s iOS software for iPhones had hurt the business. Apple now requires users to give permission for companies such as Meta to gather data about them as they browse across the web. Unsurprisingly, users have said no thanks and it has made its ad targeting less effective. The company said on Wednesday that the hit to its revenues this year would be $10bn (£7.3bn) – about 8% of last year’s income at Meta.

Mark Zuckerberg walks with Sheryl Sandberg.
Sheryl Sandberg and Mark Zuckerberg: company has ‘many targeting and measuring tools’. Photograph: Kevin Dietsch/Getty Images

Sheryl Sandberg, Meta’s chief operating officer and architect of Facebook’s advertising strategy, said during an investor call on Wednesday that the company had ways of targeting users with less data. “There are also a lot of things that small businesses and large businesses can do to take advantage of the many targeting and measurement tools we have,” she said.

However, it should be pointed out that overall revenue did grow in the three months to December, up to $33.7bn compared with $28.1bn for the same period last year. Net income – a US measure of profit – was $10.3bn for the quarter, down nearly $1bn on last year. Nonetheless, Meta remains a very wealthy and profitable business.

the meta logo on a smartphone with a metaverse computer graphic in the background
Meta is betting on the metaverse being the next big thing. Photograph: Andre M Chang/ZUMA Press Wire/Rex/Shutterstock

Patience – and money – is needed for the metaverse

The metaverse is a catch-all term for a blending of the physical and digital worlds, where people carry out their professional and social lives via a mix of virtual and augmented reality. Zuckerberg is so convinced it is the next big thing in tech that he renamed the company from Facebook Inc to Meta. But it is years away from being a fully fledged part of people’s lives. So the results from Meta’s virtual reality unit – Reality Labs, which includes the top-selling Oculus VR headsets – showed a loss of $3.3bn on revenues of less than $1bn. This is the future of Meta’s business, so expect the revenues to grow, as well as the costs.

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