Meta Platforms (META 1.11%), formerly known as Facebook, reported fiscal 2021 fourth-quarter results on Wednesday, Feb. 2. The announcement revealed a company dealing with several headwinds that are holding back revenue growth. 

Investors were disappointed to hear the news, and the stock has crashed by over 20%. Let's look closer at the figures and better understand what's causing the sell-off.

A person wearing a virtual reality headset.

Image source: Getty Images.

Meta Platforms boosted hiring in the fourth quarter 

On the top line, Meta reported revenue of $33.7 billion in the fourth quarter ended Dec. 31, 2021, a 20% increase from the same quarter the year before. Wall Street analysts were expecting it to report revenue of $33.4 billion, so it outperformed in this regard.

Looking at the bottom line, Meta reported a net income of $10.3 billion in Q4, an 8% decrease from the same time last year. Splitting the profits among the shareholders, Meta reported diluted earnings per share (EPS) of $3.67. Analysts on Wall Street expected Meta to report an EPS of $3.84. A more significant decrease in EPS than expected could be one reason the market sold off Meta's stock, although the shortfall was not substantial enough to cause the more than 20% drop in the price.

Digging a bit deeper, Meta's decrease in earnings can be attributed partly to growing its workforce. In Meta's third quarter, it announced a major strategic shift whereby it will focus more time and resources on becoming a metaverse business, hence the name change. To help accomplish this feat, Meta is hiring aggressively. Headcount increased by 23% to reach 71,970 as of Dec. 31. Indeed, general and administrative expenses as a percentage of revenue increased by 400 basis points year over year in Q4.

As part of its transition to a metaverse company, Meta reports its business under two segments: family of apps and Facebook Reality Labs. The latter will house investments, expenses, and revenue from the metaverse, augmented reality, and virtual reality products. In Q4, the family of apps segment earned an operating profit of $15.9 billion, an increase of a billion from the previous year. Meanwhile, Facebook Reality Labs generated an operating loss of $3.3 billion, 57% worse than the loss of $2.1 billion during Q4 the year prior. The investment in the transition lowered Meta's operating margin by 900 basis points year over year. Meta warned investors it would be investing significantly in the change, so it's not likely this revelation would have caused disappointment.

The primary cause of Meta's stock price crash 

Instead, the most likely cause of investor disappointment is Meta's pessimistic forecast for the next quarter. Meta told shareholders it expects to grow revenue between 3% and 11% in the first quarter of 2022. To put that growth rate into context, Meta has not had one year in the last decade where it grew revenue less than 20%. In that time, Meta has grown revenue at a compound annual rate of 45.8%. Forecasting 7% growth at the midpoint for Q1 is a significant deceleration.

Management attributes the slowdown to two primary causes: fewer ads shown to people browsing its apps and lower prices per ad. "On the impressions side, we expect continued headwinds from both increased competition for people's time and a shift of engagement within our apps toward video surfaces like Reels, which monetize at lower rates than Feed and Stories," the company said in the press release accompanying the earnings results.

Moreover, the price of ads is facing headwinds stemming from Apple's changes to privacy settings on its devices, which makes it harder for Meta to track user activity, and decreasing demand from businesses that are supply-constrained during the pandemic. Thankfully for shareholders, the latter is likely to be temporary. However, the Apple privacy changes are probably long-lasting, and the most prominent cause of the stock price sell-off.