Tik-Tok: is it time for the mega Meta meltdown?

Shares of Meta Platforms, the parent company of Facebook, Instagram, and WhatsApp fell 23 percent to $100.45 on Thursday, October 27, in pre-market trading. This stock retreat sent Meta’s market value plummeting below $300 billion for the first time since early 2016.

The sell-off began during overnight trading after a downbeat results presentation, and continued when markets reopened on Thursday October 27, in what was one of the most dramatic devaluations Wall Street had seen since investor confidence in Silicon Valley stocks began crumbling at the start of the year.

On October 29, the share price ended on $99.20

To put the downfall of Meta (formerly Facebook) in perspective, its value on Nasdaq increased between May 2012 to August 2021 (with hiccups in between), from $ 38.23 to a peak of $379.38.

From here, it nosedived rapidly, and even before the October 27 mayhem, Meta’s shares had tanked to $135.68 by the end of September 2022.

Before the latest rout, Meta shares had already fallen 60 percent in 2022, and the company had lost more than $550 billion in market capitalisation.
On February 3, 2022, Meta’s shares had plummeted 26 per cent, losing $237 billion in market value.

This decline marked the company's worst one-day loss since its Wall Street debut in 2012, and the biggest single-day drop in Dollar value of any listed firm

The cruelest year

Meta’s woes are not new, but this year has been the worst. Earlier, in March and November 2018, Facebook share’s had hit $152 and $131.55, respectively, when it was beset with the Cambridge Analytica scandal that tested consumer confidence in the social media firm and led to a series of heated congressional hearings.

Zuckerberg battered

With a 13 percent stake in Meta, Zuckerberg has seen his personal worth collapse by $90 billion so far this year. His holding, worth over $125 billion at the beginning of 2022, (according to Bloomberg data), has now fallen to $35 billion.

Proximate reason for the mayhem

The immediate reason for the October 27 mayhem is Meta Platforms posting its second revenue decline in a row, amid extremely challenging business conditions.

The carnage was due to below-expectation quarter 3 performance, with reported revenues of $27.7 billion down more than 4 percent from a year ago, after a 1 percent year on year decrease in quarter 2. Advertising revenue, which comprises 98.2 percent of the company’s total revenues, came in at $27.2 billion, down 4 percent year-on-year (YoY).

Also, the quarter 3 profit had dropped to $4.4 billion, making it the continuous fourth quarter fall in the bottom-line, something Meta had not experienced in a decade.

For the year 2022 as a whole, Meta expects total expenses to be in the range of $85- $87 billion, which is estimated to increase sharply to $96-$101 billion in 2023.

The killer

Meta’s Reality Labs unit, where the development of its virtual reality (VR) and augmented reality (AR) technology for the Metaverse is housed, has lost a whopping $9.4 billion so far in 2022, over and above a $10.4 billion loss in 2021. Reality Labs has lost $3.7 billion in just the past three months alone, and the company  expects these losses to “grow significantly’’ in 2023.

This raises a fundamental question about the statement Zuckerberg made a year ago, in October 2021, when he announced:

 “From now on, we will be metaverse-first, not Facebook-first.”

The stock markets may rise and fall but the cardinal question is whether  Mark Zuckerberg’s quest for an alternative reality has become his nemesis. Naysayers are taking aim at the project, noting how the sunk-cost fallacy — reluctance to abandon a losing proposition because you’ve invested heavily in it — has set in. Will Zuckerberg's big bet on the metaverse will pay off, because Silicon Valley has been trying to make VR happen for over three decades now, and a viable product is not in sight.

The metaverse is years away from delivering on its promise and remains an unproven medium for the mainstream consumer. Zuckerberg is asking employees, users, and investors to have faith in him and his vision. That’s a big ask for something costing the company billions of Dollars, which may never come to fruition.

Other headwinds

Apart from the Metaverse, Zuckerberg faces other headwinds as well.

For one, user growth  has definitely hit a ceiling, showing that the salad days of Facebook’s exuberant growth are over.

Two, the biggest competitive threat is TikTok, a Chinese-backed app that has grown to more than a billion users on the back of its highly shareable and strangely addictive short video posts. It competes fiercely with Meta’s Instagram for eyeballs and attention. While it is unclear if privacy scandals have dented older users’ enthusiasm for Facebook, it is painfully evident that teens are turning to Tik-Tok, the Next Big Thing.

Three, advertising revenues are  being greatly squeezed due to Apple’s App Tracking Transparency feature,  mandating that apps ask users for permission if they want to track them across the web and other apps. As expected, many Apple users are refusing to be tracked, and this is expected to cost Meta $10 billion in advertisement revenues a year.

Four, high inflation, high-interest rates, and a looming recession due to global jitters have made advertisers tighten their purse strings, hurting digital advertising.

Five: another challenge Meta continues to face is tough regulatory and antitrust scrutiny.

Six, Meta’s troubles have been good for its competitors. Ample evidence exists that Google is growing its share of online ad revenues.

All is well?

In the past one year, Meta has gone only one way — downhill. But Mark Zuckerberg is confident that all will be well and his mega bet on the metaverse, and minor bets on improving short-video services, the content recommendation algorithm, online advertising technology, and business messaging features will yield results sooner.

But the jury is still out on this.