Meta Platforms' (META -0.28%) stock had one of its best runs during the past two years. After falling below $150 in March 2020, the stock recovered and broke its all-time high price in May of that year. The rally continued as the stock made multiple new all-time highs in 2021.
But since September last year, the stock has declined by 48% from its peak of $384 to just below $200, as of this writing. What is going on with the plummeting Meta share price?
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The latest earnings result isn't great
Last month, Meta reported its fourth-quarter result for the year ended Dec. 31, 2021. Revenue grew 20% year over year to $33.7 billion, but net income fell 8% to $10.3 billion. While the top line exceeded analyst expectations, its bottom line missed the target as cost came in higher than expected.
On the surface, the result was quite good. Revenue grew by a respectable 20%, and that was after a 33% growth in 2020! The real problem was in the weak guidance -- Meta guided for revenue to grow just 3% to 11% year over year in the first quarter of 2022.
There are many reasons behind the weak guidance. First, Meta faces a tough comparison against its 48% growth in the first quarter of 2021. Second, it expects further headwinds on ad targeting in 2021 amid the privacy changes in Apple's iOS 14, which allow users to opt-out of data-tracking, and the changes in the regulatory landscape.
On top of that, during the last earnings call, CEO Mark Zuckerberg pointed out that TikTok's short video format remains a threat to Meta since the TikTok app competes with Meta for user screen time. Although Meta retaliates with Reels, its own short video product, there is no guarantee that it can effectively counteract TikTok's rise. Even if Reels proves to be useful in retaining users, it will be a long time before Meta can monetize it.
Meta's metaverse bet remains highly speculative
No discussion of Meta is complete without covering its shift toward the metaverse. The tech conglomerate aims to become a leader in the metaverse race by investing in technologies, such as virtual reality (Oculus) and augmented reality, and creating a fair and safe ecosystem where stakeholders -- users, developers, and partners -- can flourish over the long term.
While the metaverse industry looks promising -- J.P. Morgan thinks it is worth $1 trillion in yearly revenue -- there is no guarantee that it is not a fad. Even if the metaverse trend is valid, it will take years, if not decades, for Meta to reach the trillion-dollar mark. Its latest numbers clearly illustrated that. Reality Labs, the company's metaverse segment, reported $877 million in revenue in Q4 2021. That was a meager 2.6% of its companywide revenue. Operating loss, however, came in at $3.3 billion, up by more than 50% from $2.1 billion last year.
It is too early to declare that Meta's strategic pivot toward the metaverse industry is wrong. After all, the management team led by Meta's founder has a solid track record of vision and execution, which led to its current dominance in the social media industry. Given enough time, Meta's management team might prove to be right again. Still, investors are probably more in tune with reality now after the earlier excitement.
What's next for the company?
Understandably, investors are disappointed with Meta's latest result and outlook guidance.
They shouldn't be overly pessimistic, though. The company is still the dominant social media company globally, with 2.8 billion daily active users across its family of apps. For perspective, this business made $57 billion in operating income in 2021. Even if growth slows down (which is inevitable, given the company's size), it's not the end of the world.
While investors might categorize Meta's pivot toward the metaverse as a moonshot bet, at least for now, the social media giant has all the resources -- financial, talent, and technology -- to invest and grow its business. The only caveat is that investors should monitor cash burn to ensure that losses remain at an acceptable level.
Investors will need a lot of patience through the bumpy ride ahead.
