Facebook scrambles to escape stock’s death spiral as users flee, sales drop

A yr in the past, earlier than Facebook had turned Meta, the social media firm was sporting a market cap of $1 trillion, placing it in rarefied territory with a handful of U.S. know-how giants.

Today the view seems to be a lot totally different. Meta has misplaced about two-thirds of its worth since peaking in September 2021. The inventory is buying and selling at its lowest since January 2019 and is about to shut out its third straight quarter of double-digit proportion losses. Only 4 shares within the S&P 500 are having a worse yr.

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Facebook’s enterprise was constructed on community results — users introduced their family and friends members, who informed their colleagues, who invited their buddies. Suddenly everybody was convening in a single place. Advertisers adopted, and the corporate’s ensuing income — they usually have been plentiful — supplied the capital to recruit one of the best and brightest engineers to preserve the cycle going.

But in 2022, the cycle has reversed. Users are jumping ship and advertisers are lowering their spending, leaving Meta poised to report its second straight drop in quarterly income. Businesses are eradicating Facebook’s once-ubiquitous social login button from their web sites. Recruiting is an rising problem, particularly as founder and CEO Mark Zuckerberg spends a lot of his time proselytizing the metaverse, which could be the firm’s future however accounts for just about none of its near-term income and is costing billions of {dollars} a yr to construct.

Zuckerberg said he hopes that inside the subsequent decade, the metaverse “will reach a billion people” and “host hundreds of billions of dollars of digital commerce.” He told CNBC’s Jim Cramer in June that the “North Star” is to attain these kinds of figures by the tip of the last decade and create a “massive economy” round digital items.

Investors aren’t keen about it, and the way in which they’re dumping the inventory has some observers questioning if the downward strain is definitely a death spiral from which Meta cannot get better.

“I’m not sure there’s a core business that works anymore at Facebook,” mentioned Laura Martin of Needham, the one analyst among the many 45 tracked by FactSet with a promote score on the inventory.

Nobody is suggesting that Facebook is vulnerable to going out of enterprise. The firm nonetheless has a dominant place in cell promoting and has probably the most worthwhile enterprise fashions on the planet. Even with a 36% drop in web revenue within the latest quarter from the prior yr, Meta generated $6.7 billion in revenue and ended the interval with over $40 billion in money and marketable securities.

The Wall Street drawback for Facebook is that it is not a progress story. Up till this yr, that is the one factor it is identified. The firm’s slowest yr for income progress was the pandemic yr of 2020, when it nonetheless expanded 22%. Analysts this yr are predicting a income drop.

The variety of each day energetic users within the U.S. and Canada has fallen up to now two years, from 198 million in mid-2020 to 197 million within the second quarter of this yr. Globally, person numbers are up about 10% over that stretch and are anticipated to improve 3% a yr via 2024, in accordance to FactSet estimates.

“I don’t see it spiraling in terms of cash flows in the next few years, but I’m just worried that they’re not winning the next generation,” mentioned Jeremy Bondy, CEO of app advertising agency Liftoff.

Sales progress is anticipated to hover within the single digits for the primary half of 2023, earlier than ticking again up. But even that guess carries dangers. The subsequent era, as Bondy describes it, is now moving over to TikTok, the place users can create and examine quick, viral movies quite than scrolling previous political rants from distant family members with whom they mistakenly related on Facebook.

Meta has been making an attempt to mimic TikTok’s success with its quick video providing known as Reels, which has been a significant focus throughout Facebook and Instagram. Meta plans to improve the quantity of algorithmically really useful quick movies in users’ Instagram feeds from 15% to 30%, and Bondy speculates the corporate will probably “get tremendous revenue flow from that” algorithmic shift.

However, Facebook acknowledges it is early days for monetizing Reels, and it is not but clear how effectively the format works for advertisers. TikTok’s enterprise stays opaque as a result of the corporate is privately held and owned by China’s ByteDance.

Sheryl Sandberg, who’s leaving the corporate Friday after greater than 14 years as chief working officer, mentioned in her closing earnings name in July that movies are more durable than pictures by way of adverts and measurement, and that Facebook has to present companies how to use the advert instruments for Reels.

“I think it’s very promising,” Sandberg mentioned, “but we’ve got some hard work ahead of us.”

Skeptics such as Martin see Facebook pushing users away from the core information feed, the place it makes tons of money, and towards Reels, the place the mannequin is unproven. Martin says Zuckerberg should know one thing essential about the place the enterprise is headed.

“He wouldn’t be hurting its revenue at the same time he needs more money, unless he felt like the core business wasn’t strong enough to stand alone,” Martin mentioned. “He must feel he has to try to move his viewership to Reels to compete with TikTok.”

A Facebook spokesperson declined to remark for this story.

Zuckerberg has at the very least one main cause for concern past simply stalled person progress and a slowing economic system: Apple.

The 2021 iOS privateness replace, known as App Tracking Transparency, undermined Facebook’s capability to goal users with adverts, costing the corporate an estimated $10 billion in income this yr. Meta is relying on synthetic intelligence-powered promoting to finally make up for Apple’s modifications.

That might quantity to little greater than a Band-Aid. Chris Curtis, a web based advertising skilled and marketing consultant, has seen social networks rise and fall as tendencies change and users transfer alongside. And that drawback is not solvable with AI.

“I’m old enough, and I was there when MySpace was a thing,” mentioned Curtis, who beforehand labored at Anheuser-Busch and McKinsey. “Social networks are switchable, right?”

When you take a look at Meta’s person numbers, Curtis mentioned, they counsel the corporate is “not in a good position.”

The final time Facebook’s market cap was this low, it was early 2019 and the corporate was coping with the continued fallout of the Cambridge Analytica privateness scandal. Since then, Facebook has suffered additional reputational harm, most notably from the paperwork leaked final yr by whistleblower and former worker Frances Haugen.

The most important takeaway from the Haugen saga, which preceded the identify change to Meta, was that Facebook knew of most of the harms its merchandise prompted children and was unwilling or unable to do something about them. Some U.S. senators in contrast the corporate to Big Tobacco.

Denise Lee Yohn, writer of brand-building books together with “What Great Brands Do” and “Fusion,” mentioned there’s little proof to counsel that Facebook’s rebranding to Meta late final yr has modified public notion of the corporate.

“I think the company still suffers from a lot of criticism and skepticism about whether they are a force for good or evil,” Yohn mentioned.

Rehabilitating a broken model is tough however not not possible, Yohn mentioned. She famous that in 2009, Domino’s Pizza was ready to efficiently come again from a disaster. In April of that yr, a video made as a prank by two restaurant staff went viral, exhibiting one in all them doing disgusting acts with meals whereas cooking in one of many firm’s kitchens. Both staff have been arrested and charged with meals contamination.

In December 2009, Domino’s launched a advertising blitz known as the “Pizza Turnaround.” The inventory climbed 63% within the first quarter of 2010.

Yohn mentioned the corporate’s method was, “We’ve been told our pizzas suck, and so we’re actually going to make substantive changes to what we are offering and change people’s perceptions.” While it sounded initially like “just marketing speak,” Yohn mentioned, “they actually really did change.”

Zuckerberg, alternatively, shouldn’t be “coming across as a leader who is serious about changing his culture and about changing himself and about kind of creating a company that will be able to step into the future that he’s envisioning,” she mentioned.

Meta’s reputational hit might additionally hurt the corporate’s capability to recruit top-tier expertise, a stark distinction to a decade in the past, when there was no extra prized touchdown spot for a hotshot engineer.

A former Facebook advert govt, who spoke provided that his identify not be used, informed CNBC that although TikTok is owned by a Chinese mum or dad, it now has an edge over Meta when it comes to recruiting as a result of it is seen as having much less “moral downside.”

Ben Zhao, a pc science professor at University of Chicago, mentioned he is seeing that play out on the bottom as an rising variety of college students in his division are exhibiting curiosity in working for TikTok and ByteDance.

In order to keep aggressive, given how the market has punished tech shares this yr, Zhao mentioned, Meta and Google are “having to pay more and are having certainly to hand out more lucrative stock options and packages.”

Zuckerberg’s success in pivoting to cell provides Dollarhide confidence that Meta can money in on its bet-the-farm transfer to the metaverse. In the second quarter, Meta’s Reality Labs division, which homes its digital actuality headsets and associated applied sciences, generated $452 million in income, about 1.5% of complete Meta sales, and lost $2.8 billion.

“I think Zuckerberg is very bright and very ambitious,” mentioned Dollarhide. “I wouldn’t bet against Zuckerberg just like I wouldn’t bet against Elon Musk.”

Dollarhide’s agency hasn’t owned Facebook shares, although, since 2014, preferring the trajectory of tech corporations such as Apple and Amazon, two of his prime holdings.

“The reality is they can be perceived as a value company and not a growth company,” Dollarhide mentioned, relating to Meta.

No matter what occurs within the subsequent yr or two and even three, Zuckerberg has made clear that the way forward for the corporate is within the metaverse, the place he is banking on new companies forming round digital actuality.

Zhao, from University of Chicago, says there’s immense uncertainty surrounding the metaverse’s prospects.

“The real question is — are daily users ready for the metaverse yet?” Zhao mentioned. “Is the underlying technology ready and mature enough to make that transition seamless? That’s a real question and that may not be all up to Facebook or Meta at this point.”

If Zuckerberg is true, maybe 10 years from now Meta’s inventory worth from the depths of 2022 will appear to be the low cost of the last decade. And if that occurs, predictions of a death spiral shall be mocked like a 2012 cover story from Barron’s, headlined “Facebook is worth $15” with a thumb pointing down. Four years later, it was buying and selling close to $130.

WATCH: Needham’s Martin is a Meta skeptic