The "meta-universe" Meta Platforms quarterly report "exploded", pessimistic expectations shocked investors, "blew up" the entire US stock social networking sector.
After the U.S. stock market on Wednesday, February 2, Meta Platforms announced its fiscal 2021 fourth-quarter earnings report, after which Meta's stock price plunged 23%, falling $75 to the lowest in a year, becoming the second tech giant to plummet after Netflix's earnings report.
Other social media stocks were also dragged down, with Snap plunging 18 percent, Pinterest tumbling 10 percent and Twitter down 8 percent. Hurt by a plunge in Meta, the NASDAQ 100 ETF QQQ fell more than 1.8 percent, and Google rose 7.5 percent during the intraday trading session and fell 2 percent after hours.
According to financial blogger Zerohedge, if the 23% drop occurred during the day trading session, it would be the largest one-day decline in the company's history, equivalent to erasing the market value of $165 billion (about 1 trillion yuan), or half of the market value of Ethereum, the second largest digital currency.
The stock price plummeted by 23%, the market value evaporated by more than one trillion yuan, what signal was released in the Meta Four Quarters Report?
01
Earnings reports are thunderous
After wednesday's U.S. stock market, Facebook announced its first quarterly earnings report since it renamed its parent company Meta Platforms in October last year, meta revenue rose 20% year-on-year in the fourth quarter of last year, slightly exceeding expectations; earnings per share doubled year-on-year expectations, the first net profit decline since the second quarter of 2019; key user indicators were poor, worse than expected.
More pessimistically, revenue guidance in the first quarter of this year is weak, and revenue is expected to increase by 3% year-on-year, compared with Facebook revenue growth of 48% in the same period last year.
Source: Longbridge Dolphin Research
This guidance raises questions not only about Meta's growth prospects, but also about whether the entire online advertising industry and consumer behavior has shifted.
At present, Meta's core business has major problems: declining user usage, revenue is more difficult, inflation and supply bottlenecks interfere with advertiser budgets, and its advertising pricing power continues to be negatively impacted by Apple's privacy changes.
Meta Analyst Conference Call Highlights can also partially support the above points, as follows:
1) Meta Platform (formerly Facebook), the "metacosm company", believes that building a metacosm is an expensive gamble. Meta reported that the company invested/lost $10.19 billion in Reality Labs in 2021, and CEO Zuckerberg optimistically said that some aspects of the metacosm have been transformed into "achievements" and the ticker symbol has been changed from FB to META.
2) TikTok gives Meta a new spending point. Meta executives have repeatedly spoken about the challenges faced by their short video product Reels, which is especially popular among young people. Meta believes that over time, the company can improve the monetization of Reels.
3, "conservative" Facebook may be stuck in the problem of user growth stagnation, the company in the fourth quarter of 2021 monthly active users (MAU) of 2.91 billion, quarter-on-quarter did not get growth.
4) Apple (AAPL) cracks down on online advertising, a move that continues to cause trouble for advertisers such as Meta. Shery Sandberg, Meta's chief operating officer, said smaller companies have been particularly hit hard when it comes to data collection, as they rely more on tailor-made ads. As a potential scenario, Meta plans to continue rolling out new ad measurement and commerce tools.
Overall, investors appeared disappointed with Wednesday's Meta results report, with shares falling more than 23 percent.
02
Why the thunder?
Meta Quarterly data shows earnings per share of $3.67, revenue of $33.67 billion and monthly active users of $2.91 billion. Meanwhile, analysts generally expect earnings per share of $3.84 and revenue of $33.4 billion. The number of monthly active users in the fourth quarter of last year is expected to be 2.95 billion.
Source: Meta earnings
The revenue in the financial report data is slightly higher than the expectation, but it is significantly slower than the first three quarters of last year, and the net profit and user indicators are not good.
The following will take stock of the four "lightning points" of this financial report:
1) The number of ads served continues to face two disadvantages
The main issue is that Meta expects first-quarter revenue to be between $27 billion and $29 billion, up 3% to 11% year-over-year. Even the top of the range is well below Wall Street's general expectation of $30.1 billion.
At a high level, the company said that "headwinds" in terms of ad serving volume and pricing will have an impact on performance.
The ad serving volume issue is the most shocking, simply put, people seem willing to spend less time on Meta platforms, including Facebook, WhatsApp, Instagram, and Messenger.
Company executives said on the earnings call that in terms of the number of ads, we expect to continue to face two disadvantages, one is the increasing competition for user time, and the other is the shift of user stickiness to short videos such as Reels, but its monetization ability is lower than that of more mature core products such as Feed and Stories.
Meta's entry into the short video field in response to ByteDance's TikTok has caused damage to performance to a certain extent.
Another key issue is that user behavioral preferences can shift, with people seemingly spending more time on other things than on Facebook and Instagram pages. This may reflect a willingness to spend more time outdoors after two years of strict covid-19 measures.
It could also be a sign that people are just a little tired of social media and are using social platforms less and less.
2) The advertising pricing power continues to be negatively impacted
When it comes to ad pricing, Meta faces three shocks, one of which is that Apple has introduced stricter privacy standards that allow advertisers to track consumer behavior on apps and websites on iOS devices. A year ago, the changes didn't take effect, meaning their impact will still be reflected in the growth of the first quarter. The company said it expects ad pricing power to continue to be negatively impacted due to resistance from platform and regulatory changes.
Second, Meta noted that the first quarter will contrast with "strong demand" in the same period last year, and macroeconomic challenges such as high inflation and supply chain bottlenecks are affecting advertisers' budgets.
Finally, the company expects foreign currency exchange rates to also be a headwind for year-over-year revenue growth this quarter.
Meta earnings report is a bit of a surprise, but also more difficult to sort out, just a day before the release of Meta earnings, Google's parent company Alphabet announced a comprehensive performance report that exceeded expectations and achieved a new high in net profit, and the company's stock price rose sharply.
Alphabet CEO Sundar Pichai said in a statement that the company's advertising business "continues to grow strongly," helping "millions of businesses thrive and find new customers."
In stark contrast, Meta complains that Reels' revenue is lower, but Alphabet believes YouTube's revenue is growing rapidly.
This begs the last two questions, are consumers generally reducing their use of social media, or are they simply reducing the use of the Meta platform? Are advertisers cutting back on spending, or are they diverting money from platforms like Facebook? The following "lightning point" tells us the answer to a certain extent.
3) Facebook's total number of users fell for the first time in 17 years
Meta's new earnings structure consists of two parts, one is the "app family" that includes Facebook, Instagram, Messenger, WhatsApp and other services, and the second is FRL (Reality Labs), which includes hardware, software and content related to AR (augmented reality) and VR (virtual reality).
Facebook's total number of users fell for the first time, the first time for a social media platform that has experienced endless growth since its debut 17 years ago.
According to the quarterly report of parent company Meta, Facebook lost about 500,000 global daily users in the fourth quarter of 2021 compared to the previous quarter.
Although this does not seem to be a significant decline relative to its total daily active users of 1.93 billion. But for a company driven by the number of users, it represents the end of a long-term rapid growth in users.
Facebook's user growth has stagnated, in part because of its aging user base and the fact that there are no new countries to expand. Facebook's user growth in the U.S. has begun to decline.
In addition, another part of the decline in user growth is due to increased competition from other applications. Despite Meta's efforts to pursue the attention of younger users, there are still many people who are attracted to apps like TikTok.
Data from Cloudflar, which tracks internet traffic, shows that Tiktok began to suddenly show strength in mid-February last year, replacing Google for the first time. Including Thanksgiving (November 25) and Black Friday (November 26), these Western "big days", Tiktok is also the most visited in the world. Tiktok reached 1 billion monthly active users in September.
When we include Facebook's entire "family of apps" — like Instagram and WhatsApp — its users overall are still growing, albeit relatively slowly. It increased from 2.81 billion to 2.82 billion sequentially.
Image source: Meta financial report, Longbridge Dolphin Research
4) The loss of the meta-universe strategic department has expanded year by year, with a net loss of 10 billion yuan last year!
Also concerned about the performance of the meta-universe strategy department, this financial report Meta for the first time disclosed the financial data of the FRL department containing the meta-universe strategy, the company expects that the investment in the meta-universe will reduce the operating profit in 2021 by about 10 billion US dollars, frl will not be profitable in the short term. In CEO Zuckerberg's vision of the metacosmology last July, he hoped to turn Facebook into a metacosmite company in about five years, and billions of dollars of multi-year investment would eat into profits.
According to the financial report, FRL's revenue in the fourth quarter of last year was $877 million, up 57% sequentially and 22% year-on-year. At the same time, the segment's operating loss in the fourth quarter of last year was $3.3 billion, and the net loss for each quarter of the year gradually widened, with a net loss of $10.19 billion for the full year of 2021, a net loss of $6.62 billion in 2020, and a net loss of $4.5 billion in 2019.
03
How is Meta going to break the game? By metaverse?
There's no doubt that Facebook, now called Meta, is facing a real challenge to its social media dominance. And FRL's huge loss data for three consecutive years can be seen that building a meta-universe is another expensive gamble.
In addition, according to CNBC, FRL's losses dragged down Meta's overall profitability last year. If it weren't for FRL, the company would have made more than $56 billion in profits for the full year last year. Meta's chief financial officer also said it expects meta-universe's operating losses to also "significantly increase" in 2022.
Raj Shah, a technical analyst at digital consultancy Publicis Sapient, said: "Now is the time to test the Meta metacosm, which is still a long way from making a profit or filling the advertising revenue gap after Apple's privacy policy changes. ”
The story of the metaverse is unlikely to help the number of users in the short term. As a result, Meta is also actively expanding what users want most on social media – video. Over the past month, Instagram chief Adam Moseri has focused on its short video product, Reels, and increasingly targeting young people.
Zuckerberg also made Reels a top priority for the company this year. However, Reels is still small, and competitor TikTok is strong. And because it is mainly bound to the Ins platform, the contribution to the new user may not be high, but more of an internal flow between ecosystems.
That is to say, the current role of Reels mainly lies in lengthening the user's use time in the Meta system, so the complement and pull effect on the overall income realization is still very small.
At the same time, Zuckerberg also said that Reels' thin profits will affect the growth of advertising revenue in the short term.
But on the flip side of the coin, The Wall Street Journal's Laura Foreman argues that "if everyone thinks Meta is just a company that loses its edge on social media, it will bring opportunities for long-term investors." ”
Zuckerberg said in October that Meta's metaversic goal is to "bring virtual worlds to 1 billion people over a decade." "Logically, this is likely to be achievable. Stifel's Mark Kelley estimates that by the end of this year, there will be 2.5 billion gamers worldwide in addition to China. Then Meta only needs to reach 40% of it in the next eight years to achieve its goals. If you take into account the 5% compound annual growth rate for gamers, this goal is more likely to be achieved.
Because even though Meta may not be as cool as they used to be, they still cover nearly half of the world's population. As of the first quarter of last year, more than 1 billion people visited the Marketplace launched in 2016 every month; nearly 10% of Facebook's users visited Shops within a year of launch.
In this quarter's earnings report, FRL's payments and other revenues totaled 1,032 million, an increase of 16.6% year-on-year, although the overall contribution was weaker, but significantly better than the previous management guidance. As can also be seen from the SteamVR data, the Quest 2 has rapidly improved from 33% at the end of September to 39% at the end of December. If you add Rift's data, the overall market share of Oculus is more than 50%, and the monopoly advantage is obvious.
Zuckerberg also said it plans to launch a mobile version of the virtual reality experience "Horizon World" this year.
04
What does Wall Street think?
The analysis generally pointed out that although Meta said it would invest billions of dollars to build a meta-universe virtual world, for now, its Facebook and Instagram apps and core advertising revenue, which accounts for the absolute majority of revenue, are still the focus of investors' attention.
Meta has the second largest digital advertising platform in the world after Google. Last year's third quarter, the company warned that it faced a continuous crackdown on Apple's operating system privacy changes, the macro economy and the epidemic in the fourth quarter, and "major uncertainties."
Daniel Newman, principal analyst at Digital Technology-focused Futurum Research, points out that it is important to pay attention to how sensitive the advertising business is to price increases, and how robust is Facebook in a high inflation environment? Evercore ISI analyst Mark Mahaney also believes that Apple's privacy changes clearly had a negative impact on Facebook in the third quarter, and the key question is whether the latter can further reduce this risk, or whether the negative impact has expanded.
Judging from today's Meta assessment of "high inflation and supply chain bottlenecks reduce advertiser budgets", it can be said that the most feared phenomenon in the market is happening.
Investors also want to see indicators of profitability in the FRL sector. Bank of America analyst Justin Post said last week that Wall Street wondered "how much profit loss will be caused to Meta in the coming years" by investing in metacosm. Brad Erickson, an analyst at RBC Capital Markets, said a key question investors want to see resolved is whether there is a clear path to the initial monetization of the metacosmity.
Since Meta released the Metacosmum Manifesto, there have been 224 earnings calls from U.S. companies in 2021 that mention "metacosmity" once, compared to just seven in 2020, showing the popularity of metaversity as the next mainstream concept after the mobile Internet. But Kim Forrest, chief investment officer at Bokeh Capital, warned that Meta is expected to invest heavily in the meta-universe and that the first movers cannot guarantee success.
Global X research analyst Pedro Palandrani also called the metacosmity a "long-term story," with investors paying more attention in the short term to how Meta navigates Apple's privacy changes, e-commerce business breakthroughs, and ways to monetize Messenger or the short video Reels feature. (Edited by Wang Li)
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