These aren’t exactly salad days for Facebook parents Metaplatforms (TARGET). In fact, one could argue that the social media giant is past its prime, as Meta’s stock has lost more than half its value since September.
For starters, virtually all of Meta’s revenue comes from advertising, which is currently declining and changing. Also, the company’s next big thing, the metaverse, is a decade or more away from taking off.
In addition, the company has to manage many other perplexing challenges. They include increased competition and losses in tracking users. This is in addition to a threatening regulatory environment.
All of these issues have come into focus in recent days. For the first time in its 18-year history, the company formerly known as Facebook posted its first quarterly revenue decline when it reported second-quarter results on July 27. That sent Meta shares down 5.2%.
It all begs the question: Are there good reasons to buy or hold Meta stock?
Meta Stock: Waiting on the Sidelines
“We recommend that investors stay on the sidelines while Meta assesses various structural valuation risks, including changes in consumer behavior, competition, moat degradation, regulatory risks and Metaverse investment risks,” he wrote Needham analyst Laura Martin in a note to clients after Meta reported earnings.
Martin thinks the forward estimates for Meta’s performance are too high. He points out that the company plans to invest more than 10 billion dollars in the creation of the metaverse. It is a radically new form of communication that is a long way off.
The metaverse combines virtual and augmented reality technology to create a synthetic world. In it, users walk around, represented by a virtual figure known as an avatar.
Martin estimates that the company’s metaverse investments will lose more than $20 billion in 2022. That’s up from $10 billion in 2021.
“This will increase to more than $30 billion by 2023, according to our estimate,” the analyst said.
“Meta talks about the returns on its Metaverse investments in terms of 2030, well beyond most investors’ time frames,” Martin added. “You don’t need to be in Meta today if your current investments will pay off in 2030. Also, if the world changes during that period, they may never pay off.”
Second quarter results fall short
For its second quarter, Meta reported adjusted earnings of $2.46 per share, down 32% from the year-ago period. Revenue of $28.8 billion fell about 1%, missing estimates on the top and bottom lines.
“Our main takeaway from the numbers and the earnings call was that the main issue facing the company is a potential slowdown in the economy,” wrote Meta stock analyst Ali Mogharabi of Morningstar in your note to clients. “The company’s first year-over-year revenue decline indicates demand is slowing, reflecting economic uncertainty, the impact of Apple’s data privacy changes and increased competition.”
For its third quarter, Meta expects revenue between $26 billion and $28.5 billion. That’s below FactSet estimates of $30.4 billion.
“The outlook reflects a continuation of the weak advertising demand environment we experienced throughout the second quarter, which we believe is driven by broader macroeconomic uncertainty,” Meta CFO David Wehner said in a statement. written statements with the Publication of meta earnings.
Revenue declines because of Apple
More than 95% of Meta’s revenue comes from mobile devices, which are controlled by Apple and Google, through Android. Apple’s decision to give users more privacy could cost Meta $10 billion in lost revenue this year. If Google also moves in this direction, it could have a similar impact.
Among its other problems, Meta remains under pressure from congressional antitrust charges. Also, COO Sheryl Sandberg is leaving the company. He was instrumental in growing Meta’s advertising business over the past 14 years.
There have also been changes in consumer behavior that have hurt Meta. During the pandemic, consumers shifted to video platforms like TikTok and YouTube. They also streamed more video games.
Meta Stock: Gen Z looks elsewhere
This is especially true for Generation Z, consumers roughly between the ages of 10 and 25 and highly coveted by advertisers. Today, Gen Z users connect through a range of apps.
This includes Amazon (AMZN) for live streaming and gaming, Discord for private chat groups, BeReal for spontaneous updates, and Poparazzi for photos of friends. It also comes from increased competition snap (SNAP), Pinterest (PINS), etsy (etsy) i Twitter (TWTR).
Of course, Meta hasn’t stood idly by with all the competitive pressure it’s getting.
For example, their development of Reels is Facebook’s answer to TikTok. It is investing heavily in artificial intelligence to increase the use of its various platforms such as Instagram. And it is developing new technologies to boost advertising and sales.
Making hundreds of billions in revenue
“We’re focused on making the long-term investments that will position us to be stronger after this crisis, including our work on our discovery engine, Reels, our new ad infrastructure and the metaverse, and we’re also focused. on being rigorous in measuring returns and sizing those investments properly,” Chief Executive Mark Zuckerberg said on the post-earnings conference call with Meta stock analysts.
“Given some of the product and business limitations we face now, I believe even more that the development of these platforms will unlock hundreds of billions of dollars, if not trillions over time,” Zuckerberg said.
“This is obviously a very expensive undertaking over the next few years,” he continued. “But as the metaverse becomes more important in every part of how we live from our social platforms and entertainment to work and education and commerce, I’m sure we’ll be happy to have played a role in building it.”
The question is whether investors will have the patience to wait for Meta shares. It also begs the question: Is the sun setting on the glory years for Facebook and Meta stocks?
Meta shares fell 1% to close at 159.10 on the stock market today.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more information on technology stocks, analysis and financial markets.
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