Based on Meta Platforms (META 0.43%) nearly 80% run higher so far this year, you could be forgiven for thinking this is the stock price of a company with soaring revenue. But this is far from reality. In fact, the current consensus analyst estimate calls for Meta's first-quarter revenue to fall 1% year over year. Even more, this would mark the company's fourth quarter in a row of declining revenue on a year-over-year basis.
Why isn't Meta's top-line revenue growth ready to kick into high gear yet? It boils down to the challenges the company is facing in its advertising segment, which accounts for nearly all of the Facebook parent's revenue. That said, investors shouldn't expect strong growth from Meta's reality labs business either.
Understanding Meta's revenue challenges
While a weak economy is certainly weighing on Meta, the first major challenge that started taking a toll on Meta's top line was a technological issue. In 2021, Apple (AAPL -0.35%) started rolling out a privacy feature on iOS that made it difficult for third-party apps like Meta's Facebook and Instagram to target users with ads and measure ad performance on the iPhone maker's platform. By the fourth quarter of 2021, Meta could tell this was going to weigh on the company's results, so management guided for a dramatic slowdown in top-line growth in the first quarter of 2022.
Chart source: The Motley Fool.
"[W]e will lap a period in which Apple's iOS changes were not in effect and we anticipate modestly increasing ad targeting and measurement headwinds from platform and regulatory changes," said Meta chief financial officer at the time, David Wehner (Meta has since hired a new CFO).
Sure enough, revenue slowed to 7% growth in the first quarter of 2022, down from 20% growth in the fourth quarter of 2021. Staring in Q2 2022, revenue has declined on a year-over-year basis each quarter since.
Meta said in its fourth-quarter 2021 earnings call that it would be "a multiyear development journey" to rebuild its advertising optimization systems for the new environment. This is proving true.
In addition to technological challenges, the company has also repeatedly cited macroeconomic weakness as a headwind on revenue. This challenge is expected to persist in 2023.
Finally, another factor weighing on the stock has been a shift in user engagement across Facebook and Instagram to the TikTok-like viewing format, Reels, which hasn't been monetized as well as Meta's more mature viewing formats.
While Meta will likely demonstrate improvement in ad targeting and measurement this year and will almost certainly better capitalize on the monetization of its popular Reels format, these two catalysts may not be enough to offset macroeconomic headwinds. Case in point, Meta guided for first-quarter revenue to be between $26 billion to $28.5 billion, compared to revenue of $27.9 billion in the year-ago quarter. Even the high end of this guidance, therefore, would only represent 2% growth.
What about reality labs?
Hold your breath. Results in the nascent segment, where Meta accounts for sales of augmented and virtual reality consumer hardware, software, and content, have been disastrous. Not only has revenue in the segment been declining, but Meta is running the business at a massive loss. It lost $4.3 billion in the fourth quarter of 2022 alone. Its full-year loss was $13.7 billion.
Plus, even if reality labs revenue picked up, it's too small to make a difference. It accounted for less than 2% of Meta's 2022 revenue.
All of this to say, while Meta's top line could have returned to growth in Q1, any reported growth will likely be moderate. Indeed, given how the macroeconomic environment doesn't seem to be improving, any growth from Meta for the rest of the year will likely be meager.
We'll get a better idea of how well Meta is holding up in this environment when the company reports first-quarter earnings on April 26.
