Meta Platforms (META -0.71%) is having a rough year in 2022. The stock is down 50% off its high as it faces several powerful headwinds simultaneously. To make matters worse, there could be more on the way.
The Walt Disney Company (DIS -0.12%) has announced it will be launching an ad-supported tier of its flagship streaming service Disney+ later this year. Further, Netflix (NFLX -1.74%) said it would be launching an ad-supported version. Why could that be a headwind for Meta Platforms? Let's look into the details below.
More digital advertising inventory is coming onto the market
Meta Platforms, formerly known as Facebook, is a dominant social media company transitioning into a metaverse business. The critical point is that most of its revenue and profits will come from social media apps, including Facebook, WhatsApp, Instagram, and Messenger. These sites are free to join and use, so the company makes money by showing advertisements to people browsing the apps.
That's been a lucrative business for Meta. Revenue increased from $5 billion in 2012 to $118 billion in 2021. The company is only behind Alphabet in revenue generated from advertising. Digital ad sales are a profitable business. Indeed, Meta's operating profit margin was 39.6% in 2021. Once the technology is set up, the process is almost entirely automated and doesn't cost the company selling the ads much for incremental sales.
Meta's lucrative business faces several headwinds, including Apple's privacy changes, decreasing advertiser demand due to supply shortages and the war in Ukraine, and increased competition from TikTok. Now, with Disney and Netflix launching ad-supported versions of streaming services, it could unleash a swath of new advertising supply onto the digital ad market. In most economic scenarios, when supply goes up, the price comes down.
Netflix boasted 222 million subscribers as of March 31. Disney+ boasted 138 million subscribers as of April 2. Those subscribers are likely part of households, which means total viewers are more extensive than total subscribers. Undoubtedly, marketers will allocate part of their budgets to those services to reach those viewers. Unfortunately for Meta, some of that could come at the expense of budgets allocated to its platforms.
Overall, advertisers spent $763 billion on marketing in 2021. That was up by 22.5% from the year before. More relevantly, a growing share of that spending is moving to digital channels -- 64.4% in 2021, up from 52.1% in 2020.
So the digital advertising pie is significant and growing, but no one likes it when their piece of the pie gets smaller. However, that may be the scenario Meta finds itself in toward the end of this year and 2023. Perhaps its decision to transition to the metaverse was prescient.
Is this reason to sell Meta Platforms stock?
The stock is already down 50%, and if this risk materializes, it could put more pressure on the stock. However, Meta's stock is so cheap when measured by its price-to-earnings and price-to-free-cash-flow ratios that it appears to be pricing in all the bad news. These newest headwinds from Disney and Netflix are no reason for existing shareholders to panic and sell.