Meta Platforms (META 0.14%) is experiencing a challenging year. Apple's privacy changes limit its ability to deliver targeted advertising, while supply chain disruptions are decreasing business demand for advertising. Rising digital advertising inventory is taking marketing budgets away from Meta. And the Russian invasion of Ukraine is increasing uncertainty, which lowers spending by advertisers.
The headwinds that I will discuss in greater detail below have played a meaningful part in bringing down its stock price by 50% off its highs in 2021. More importantly, these factors hurt revenue growth.
Image source: Getty Images.
1. Apple's privacy changes
Apple has changed its privacy policy, giving users a choice to opt in to allow tracking across apps. The new policy has made it more challenging for Meta Platforms to collect data on its 2.9 billion daily active users. Meta uses this data to sell precision advertising to its business partners. Of course, marketers value this data because it reduces waste in ad budgets. The higher return on investment for advertisers can partly explain how Meta's revenue has exploded from $56 billion to $118 billion in the last three years.
Data by YCharts.
Consider a National Football League fan in Texas -- this individual is unlikely to take a yoga class in San Francisco. Similarly, wouldn't the Dallas Cowboys be interested in persuading this individual to visit the football stadium or perhaps try to sell them a season ticket subscription? Data gives marketers access to the customers who are most likely interested in buying their products -- in other words, qualified prospects.
It will not be surprising if advertiser demand on Meta decreases if it cannot find a workaround to these changes that are reducing its ability to target users.
2. Supply chain disruptions
One of the secondary consequences of the coronavirus pandemic has been widespread supply chain disruptions. Consumer behavior has shifted in favor of purchasing goods over services. Meanwhile, output and transportation of goods have been constrained due to outbreaks of COVID-19 that send workers home for several days and weeks. These trends have meant folks had seen their favorite items out of stock more frequently.
If you're a business that is barely keeping up with organic demand for your products, you will reduce your advertising spend. For one, you don't want to frustrate customers who come to your store only to find the item sold out. And, by reducing advertising, you increase the profits of the units you can produce and sell in any given month.
3. Rising digital advertising inventory
Digital advertising has gained in popularity over non-digital formats over the years. In 2021, marketers spent $763 million globally, and 64.4% of that was through digital channels. That was up from 52.1% in 2019. As a result, it is attracting new players to the industry. For instance, Amazon has developed a lucrative advertising business. Following suit are Disney and Netflix, which have announced ad-supported versions of their popular streaming services.
The increase in digital ad inventory could take budgets away from Meta Platforms. Further, the law of economics suggests that an increase in supply tends to lower prices. Therefore, it could reduce the price per ad that Meta earns.
4. The Russian invasion of Ukraine
Finally, the Russian invasion of Ukraine is displacing millions of people and raising fears in the region of further escalation. Businesses in Russia and Ukraine are sure to pull back on advertising. Moreover, as part of sanctions, Meta has halted accepting advertisements from Russian advertisers globally, while Russia has blocked access to Facebook, further contributing to a loss of revenue and ad demand. In a more bearish scenario, consumers in surrounding countries could also lower planned expenditures and increase savings, until there's clarity on Russia's aggression toward its neighbors.
The headwinds are arguably priced into Meta's stock
Data by YCharts.
This is no reason for investors to panic and sell Meta Platforms' stock. At this point, they should only be cautiously observing the trends. Meta is trading at a price-to-earnings ratio of 14.5 and a price-to-free cash flow of 13.6. Its lowest valuation in years suggests that these headwinds may already be priced into Meta's stock.
