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

Facebook CEO Mark Zuckerberg testifies earlier than the U.S. House Financial Services Committee throughout An Examination of Facebook and Its Impact on the Financial Services and Housing Sectors listening to on Capitol Hill in Washington on Oct. 23, 2019.

Xinhua News Agency | Getty Images

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. expertise giants.

Today the view appears 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 share losses. Only 4 shares within the S&P 500 are having a worse yr.

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 — and so they have been plentiful — supplied the capital to recruit the perfect and brightest engineers to hold the cycle going.

But in 2022, the cycle has reversed. Users are leaping 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 often is 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 stated 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 informed 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 passionate about it, and the best way they’re dumping the inventory has some observers questioning if the downward strain is definitely a death spiral from which Meta cannot get well.

“I’m not sure there’s a core business that works anymore at Facebook,” stated 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 prone to going out of enterprise. The firm nonetheless has a dominant place in cellular promoting and has one of the worthwhile enterprise fashions on the planet. Even with a 36% drop in internet earnings within the newest 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 development story. Up till this yr, that is the one factor it is recognized. The firm’s slowest yr for income development was the pandemic yr of 2020, when it nonetheless expanded 22%. Analysts this yr are predicting a income drop.

The variety of each day lively 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, consumer numbers are up about 10% over that stretch and are anticipated to improve 3% a yr by means of 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,” stated Jeremy Bondy, CEO of app advertising and marketing agency Liftoff.

Sales development is predicted to hover within the single digits for the primary half of 2023, earlier than ticking again up. But even that wager carries dangers. The subsequent era, as Bondy describes it, is now transferring over to TikTok, the place users can create and think about brief, viral movies somewhat than scrolling previous political rants from distant family with whom they mistakenly linked on Facebook.

Meta has been attempting to mimic TikTok’s success with its brief video providing known as Reels, which has been a serious focus throughout Facebook and Instagram. Meta plans to improve the quantity of algorithmically advisable brief 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, stated in her last earnings name in July that movies are more durable than pictures by way of advertisements and measurement, and that Facebook has to present companies how to use the advert instruments for Reels.

“I think it’s very promising,” Sandberg stated, “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 necessary 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 stated. “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 no less than one main motive for concern past simply stalled consumer development and a slowing financial system: Apple.

The 2021 iOS privateness replace, known as App Tracking Transparency, undermined Facebook’s capacity to goal users with advertisements, 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 adjustments.

That might quantity to little greater than a Band-Aid. Chris Curtis, an internet advertising and marketing knowledgeable and advisor, has seen social networks rise and fall as developments 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,” stated Curtis, who beforehand labored at Anheuser-Busch and McKinsey. “Social networks are switchable, right?”

When you have a look at Meta’s consumer numbers, Curtis stated, they recommend the corporate is “not in a good position.”

‘Force for good or evil’

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 injury, most notably from the paperwork leaked final yr by whistleblower and former worker Frances Haugen.

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

Former Facebook worker and whistleblower Frances Haugen testifies throughout a Senate Committee on Commerce, Science, and Transportation listening to entitled ‘Protecting Kids Online: Testimony from a Facebook Whistleblower’ on Capitol Hill, in Washington, U.S., October 5, 2021.

Jabin Botsford | Reuters

Denise Lee Yohn, writer of brand-building books together with “What Great Brands Do” and “Fusion,” stated there’s little proof to recommend 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 stated.

Rehabilitating a broken model is tough however not not possible, Yohn stated. She famous that in 2009, Domino’s Pizza was in a position to efficiently come again from a disaster. In April of that yr, a video made as a prank by two restaurant staff went viral, displaying considered one of 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 and marketing blitz known as the “Pizza Turnaround.” The inventory climbed 63% within the first quarter of 2010.

Yohn stated the corporate’s strategy 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 stated, “they actually really did change.”

Zuckerberg, alternatively, just isn’t “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 stated.

Meta’s reputational hit might additionally hurt the corporate’s capacity 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 given that his identify not be used, informed CNBC that despite the fact that 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 considered as having much less “moral downside.”

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

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

The bull case

Still, Zuckerberg has a historical past of proving his doubters unsuitable, stated Jake Dollarhide, the CEO of Longbow Asset Management in Tulsa, Oklahoma.

Dollarhide remembers when buyers ran from Facebook not lengthy after its 2012 IPO, scoffing on the firm’s capacity to transfer “from the PC to the mobile world.” Facebook’s cellular enterprise shortly caught hearth and by late 2013, the inventory was off to the races.

Zuckerberg’s success in pivoting to cellular 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 misplaced $2.8 billion.

“I think Zuckerberg is very bright and very ambitious,” stated 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 stated, concerning 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.

Meta could grow the metaverse, but there's a long road ahead, says Jefferies' Brent Thill

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 stated. “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 seem like the low cost of the last decade. And if that occurs, predictions of a death spiral can be mocked like a 2012 cowl 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

I'm not sure there's a core business at Meta that works anymore, says Needham's Martin

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