Facebook is mortal.
Shares of Facebook parent Meta Platforms (NASDAQ: FB) crashed Wednesday night after profits in the quarter fell more than expected and it called for first-quarter revenue growth to be well below its usual breakneck pace, forecasting a top-line increase of as low as 3%. Previously, the only time its revenue growth had dipped below 20% was when the pandemic first hit.
The 26% sell-off Thursday might be hard to stomach, but it's clearly deserved. Let's take a look at three of the most glaring disappointments in Meta's fourth-quarter earnings report.
1. Facebook guidance: Is the growth story over?
Guidance was the most obvious culprit for the stock's plunge. The company said it expects Q1 revenue to come in at $27 billion to $29 billion in the first quarter, representing just 3% to 11% growth. Management cited headwinds from both impressions and price growth.
On the earnings call, CEO Mark Zuckerberg specifically noted the threat from ByteDance's TikTok, which has rapidly taken eyeballs away from Facebook and Instagram, and said the company is promoting Reels, its TikTok-like video product, to help keep users on Facebook platforms. Currently, Reels monetizes at lower prices than the news feed or Stories, so the expansion of Reels will slow down revenue growth.
The company is also still facing ad-targeting challenges from Apple's ad-tracking transparency initiative, which wasn't in effect a year ago. Meta is also dealing with macro-level challenges such as supply chain issues and cost inflation that is affecting advertiser demand, as well as a stronger U.S. dollar, which makes international revenue worth less.
Most of these challenges seem to be temporary, and the company will start to cycle through the effect of iOS changes in the second quarter, but it's unclear if Meta can return to the days of 20%-plus revenue growth. Still, its growth should improve after the first quarter as some of those headwinds fade.
2. Meta's user growth stalled
Perhaps the most alarming data point in the quarter was that Facebook's user growth actually declined slightly. From the third quarter, daily active users on the flagship social network slipped from 1.93 billion to 1.929 billion, or a decline of about 1 million users. That's the first sequential decline for the key metric ever. Growth had already basically stalled in North America and Europe, but this was the first time the company hit a wall in the Asia-Pacific and Rest of World regions.
Monthly active users were up slightly, and Meta also reported modest growth in its family of apps, which include Instagram and WhatsApp, but even those results were still well below its historical growth rate.
Facebook's user base is massive. About half of the world's population uses one of its apps every month. But the sudden slowdown in user growth reflects more than just the business's maturity. Competition from entrants like TikTok, as well as a possible COVID-19 hangover, seem to be affecting growth.
3. The metaverse may be a boondoggle
Zuckerberg already told investors that his company would spend around $10 billion in 2021 on Reality Labs (RL), its division devoted to virtual and augmented reality and dedicated to creating products and services for the metaverse. However, a gaping fourth-quarter loss in RL and only moderate growth showed that it will likely take several years for the metaverse bet to pay off.
Meta reported a $3.3 billion operating loss from RL in the quarter, but what was more disappointing was that revenue in the segment only grew 22% to $877 million, essentially matching the growth rate of its advertising business. That growth also disappointed after reports showed that Oculus was the top downloaded app in the U.S. around Christmas, indicating that the Oculus Quest 2 virtual reality headset was a popular gift over the holiday season.
If revenue growth in RL doesn't accelerate, Meta will be burning billions in cash annually for several years for a project that still seems highly uncertain.
What all this means for investors
There was plenty of bad news in the report, but the good news is that many of these issues are temporary in nature. The worst of Apple's ad-tracking changes are now priced into the stock and will soon be in the rearview mirror. Supply chain challenges will eventually alleviate, and Facebook's ad monetization should improve as advertisers get familiar with Reels. The other thing to remember is that Facebook is now trading at a price-to-earnings ratio of just 18, meaning that if its growth rate rebounds, the stock will surely outperform from here.
Facebook has successfully responded to plenty of challenges in the past, including new rivals like Snapchat and political scandals like Cambridge Analytica. Several different forces are now affecting the company at once, and its growth rate may not recover to previous levels, but considering the stock price and the many competitive advantages Meta still enjoys, it seems like a mistake to sell the stock now.