Meta Platform's (META -2.28%) fourth-quarter and full-year 2021 financial results were full of surprises. The parent company of Facebook and Instagram saw 26% of its market capitalization wiped out in a single day, the largest one-day drop in history, following the earnings announcement.
Meta is staring down a number of macroeconomic issues such as supply chain disruptions and inflation, which could impact advertising budgets, pressuring the social media giant's core revenue stream. However, despite these near-term hiccups, management appears to be focused on its long-term objective of building the metaverse.
Did investors overreact by wiping out over $200 billion in market capitalization, or is Facebook possibly trying to deflect from bigger issues and distract investors with its metaverse ambitions?
Times are changing
Meta generated $117.9 billion in total revenue during 2021, representing 37% growth year over year. The company's research and development (R&D), and sales and marketing (S&M) costs increased 34% and 21%, respectively, primarily due to its metaverse development.
On a full-year basis, it may appear that Meta is deploying capital efficiently as it has been able to increase revenue at a faster clip than its costs are growing. However, the fourth-quarter results on a standalone basis shed light on a different story.
In this quarter, while Meta increased revenue 20% year over year to $33.7 billion, overall costs increased 38% due to heavier investment in R&D and S&M. As a result, quarterly profit declined year over year from $11.2 billion in 2020 to $10.3 billion in 2021.
Management noted that inflation and supply chain disruptions are impacting advertising budgets, hence products are monetizing at lower rates on the platform. On top of that, Apple (AAPL -2.19%) updated its privacy policies on mobile devices, which could result in some near-term headwinds for Meta.
The changes Apple made have resulted in two primary challenges for advertisers. First, the accuracy of Meta's advertising targeting decreased. Second, measuring outcomes from ads is becoming more difficult. These changes have come at a high cost for Meta. For instance, the company now needs to invest in additional resources and methods to ensure its targeted ads reach the correct end-user.
Management alluded these privacy-related changes to iOS are impacting several different areas of Meta's business, including gaming and e-commerce. Given these new headwinds to generate revenue, the company estimates that revenue will be impacted by roughly $10 billion in 2022.
Meta has a lot on its plate to sustain its core advertising business. But investors seemed to punish the company out of fear that it is distracted by metaverse creation over addressing problems in its core business.
Image source: Getty Images.
Is the juice worth the squeeze?
Although the metaverse has garnered a lot of hype and excitement in online forums, investors need to realize that we are in the very early innings of its development. The metaverse has not yet gained critical mass appeal, and several large technology companies are still figuring out where they will even fit in the metaverse, should they choose to participate.
Facebook began as a networking website inside founder Mark Zuckerburg's college dorm room. Over the course of its lifetime, Facebook acquired photo-sharing website Instagram, messaging platform WhatsApp, and virtual reality start-up Oculus. Although all three of these businesses contribute meaningfully to Facebook's family of apps, there is one common denominator: Zuckerberg did not build these companies, he built Facebook.
From a macro standpoint, whether the metaverse turns into something big or not is somewhat irrelevant. Instead, investors should be asking whether or not they believe Zuckerberg can build a new company from scratch.
When speaking about the metaverse during the third-quarter earnings call in October, Zuckerberg admitted, "in 2021, we expect these investments to reduce our overall operating profit by approximately $10 billion, and I expect this investment to grow even further for each of the next several years." He followed this up with: "So for the next one and three years, especially, I think what you'll see is us putting more of the foundational pieces into place. This is not an investment that is going to be profitable for us anytime in the near future."
On top of the significant investment metaverse will cost, Facebook guided for 3% to 11% year-over-year revenue growth for the first quarter of 2022. It would be unfair to say that this level of growth is a cause for concern. However, when taking a longer-term view into account, 3% growth for Meta will not allow the company to generate the cash flow needed to fund its new projects and services. Although the company has $48 billion of cash and marketable securities on its balance sheet, the prospects of effectively building a new company focused on the metaverse pose a gigantic risk-reward scenario.
A genius evolution, or a giant distraction?
According to a Morgan Stanley research report, U.S. daily active users spent a total of 7 trillion minutes on social media in 2021, up from 5.1 trillion minutes just two years ago. Morgan Stanley estimates that Facebook and Instagram combined for 45% of this growth, while TikTok accounted for 60%. Although the social media landscape is ripe with competition, platforms such as Pinterest, Twitter, and Snap's Snapchat do not seem to be generating similar growth to either Facebook's family of apps or TikTok.
Meta is facing an existential crisis head-on, and the market is skeptical of its ability to reinvent itself. 2022 should set the stage for the future of the company and the development of the metaverse. Investors should keep a keen eye and assess the company's growth and expense profile throughout the year. As time goes on, it should become clearer if Meta is making progress in its new development or sacrificing growth in the core business to fund an ambitious, losing project.
