Explained: The tumbling of Meta platforms’ shares

What was the trigger for the sheer drop in shares? Is the Metaverse not profitable?

The story so far: The shares of Meta Platforms, the parent company of social media giant Facebook, crashed by as much as 25% on Thursday, wiping out over $200 billion from the company’s market value. The crash came after Meta on Wednesday announced its earnings results for the fourth quarter of 2021 which did not impress investors. The 25% crash in Meta shares is its biggest fall since its debut in 2012.

THE GIST

• The shares of Meta Platforms crashed by as much as 25% on Thursday, wiping out over $200 billion from the company’s market value. This was triggered after Meta released its quarterly earnings statement last week informing investors that Facebook lost half a million active users during the fourth quarter.
• Meta earns most of its revenues through advertising and the fall in the number of active users of Facebook is seen as a huge red flag. In addition, changes to Apple’s privacy policy have given iPhone users the choice to opt out of being tracked by sites like Facebook. This has made it harder for Facebook to show users targeted ads. It is expected that Meta will lose about $10 billion in revenue in 2022 due to Apple’s new privacy policy.
• Investors have also been uncertain about the future of Meta as the company tries to reinvent itself. In fact, it was only last year that Facebook renamed itself as Meta Platforms to highlight its new immersive virtual experience through the metaverse. However, the success of the company’s new pivot is far from certain and is expected to take years to come into fruition and will cost billions of dollars.

Why do shares move up or down?

The price of a share generally reflects the expectations of investors regarding the future cash flow that they can earn from the share. This is the reason why shares of even loss-making companies can appreciate significantly if investors expect these companies to earn significant profits in the future. At the same time, established companies earning billions in profits for their shareholders can still see their stock prices tank if investor expectations regarding the future earnings of these companies begin to sour. Since expectations about the future earnings of a share can change within a matter of just a few seconds or less, share prices are prone to sudden jumps or falls, as in the case of Meta’s stock last week.

Why exactly are investors concerned about Meta’s future earnings?

Meta’s quarterly earnings statement last week informed investors that Facebook lost half a million active users during the fourth quarter. This is the first time that Facebook has witnessed a drop in its active user base, leading analysts to believe that its long growth story may be over. Meta CEO Mark Zuckerberg, who lost around $20 billion of his personal wealth due to the crash, noted that the company’s rival TikTok was a growing threat to its business. There have also been concerns around the demography of Facebook users as younger users prefer other competing platforms over Facebook.

Meta earns most of its revenues through advertising and the fall in the number of active users of Facebook is seen as a huge red flag. It should be noted that Meta reported an overall increase in active users, thanks to the popularity of its other platforms such as Instagram and WhatsApp. But analysts believe that it will be much harder for Meta to monetise its user base through these new platforms.

Another area of concern for investors has been the sustainability of Meta’s advertising revenues. Of late, changes to Apple’s privacy policy have given iPhone users the choice to opt out of being tracked by sites like Facebook. This has made it harder for Facebook to learn more about what its users do online and make money using this information by showing them targeted ads for which advertisers want to pay. It is expected that Meta will lose about $10 billion in revenue in 2022 due to Apple’s new privacy policy.

Investors have also been uncertain about the future of Meta as the company tries to reinvent itself. In fact, it was only last year that Facebook renamed itself as Meta Platforms to highlight its change in focus, from offering users the traditional social media experience to offering them a new immersive virtual experience through the metaverse. However, the success of the company’s new pivot is far from certain and is expected to take years to come into fruition and will cost billions of dollars. The shaky confidence of investors, some say, was reflected in Meta’s stock price even before Thursday’s crash. Meta’s shares have fallen by almost 40% since the peak that they hit in September last year.

What lies ahead?

No one knows for sure what lies ahead for the company. Meta invested over $10 billion in developing the metaverse last year and only time will tell whether this investment is justified.

As the company adjusts this investment as an expense against its current revenues, its profits are likely to be adversely affected in the short-term and weigh on the price of its share.

It should also be noted that the technology business with its low barriers to entry has traditionally witnessed a lot of churn with giant companies which once seemed to enjoy a strong monopoly getting uprooted by new, more agile entrants.

Facebook, for instance, came to be the most popular social networking site by killing Orkut which was once very popular among internet users.

Google’s complete obliteration of Yahoo! from the search engine business is another example of creative destruction that is widespread in the technology market.

Gyrations in the price of Meta shares will likely reflect all these uncertainties in the coming days.

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