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Facebook scrambles to flee death spiral as users flee, sales drop

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Facebook founder and CEO Mark Zuckerberg arrives to testify following a break during a Senate Commerce, Science and Transportation Committee and Senate Judiciary Committee joint hearing about Facebook on Capitol Hill in Washington, DC.

Saul Loeb | AFP | Getty Images

A 12 months ago, before Facebook had turned Meta, the social media company was sporting a market cap of $1 trillion, putting it in rarefied territory with a handful of U.S. technology giants.

Today the view looks much different. Meta has lost about two-thirds of its value since peaking in September 2021. The stock is trading at its lowest since January 2019 and is about to shut out its third straight quarter of double-digit percentage losses. Only 4 stocks within the S&P 500 are having a worse 12 months.

Facebook’s business was built on network effects — users brought their friends and relations, who told their colleagues, who invited their buddies. Suddenly everyone was convening in a single place. Advertisers followed, and the corporate’s ensuing profits — and so they were plentiful — provided the capital to recruit the perfect and brightest engineers to maintain the cycle going.

But in 2022, the cycle has reversed. Users are jumping ship and advertisers are reducing their spending, leaving Meta poised to report its second straight drop in quarterly revenue. Businesses are removing Facebook’s once-ubiquitous social login button from their web sites. Recruiting is an emerging challenge, especially as founder and CEO Mark Zuckerberg spends much of his time proselytizing the metaverse, which could be the company’s future but accounts for virtually none of its near-term revenue and is costing billions of dollars a 12 months to construct.

Zuckerberg said he hopes that inside the subsequent decade, the metaverse “will reach a billion people” and “host a whole bunch of billions of dollars of digital commerce.” He told CNBC’s Jim Cramer in June that the “North Star” is to achieve those kinds of figures by the top of the last decade and create a “massive economy” around digital goods.

Investors aren’t captivated with it, and the best way they’re dumping the stock has some observers questioning if the downward pressure is definitely a death spiral from which Meta cannot get better.

“I’m undecided there is a core business that works anymore at Facebook,” said Laura Martin of Needham, the one analyst among the many 45 tracked by FactSet with a sell rating on the stock.

No person is suggesting that Facebook is liable to going out of business. The corporate still has a dominant position in mobile promoting and has one of the profitable business models on the planet. Even with a 36% drop in net income in the newest quarter from the prior 12 months, Meta generated $6.7 billion in profit and ended the period with over $40 billion in money and marketable securities.

The Wall Street problem for Facebook is that it’s now not a growth story. Up until this 12 months, that is the only thing it’s known. The corporate’s slowest 12 months for revenue growth was the pandemic 12 months of 2020, when it still expanded 22%. Analysts this 12 months are predicting a revenue drop.

The variety of each day lively users within the U.S. and Canada has fallen up to now two years, from 198 million in mid-2020 to 197 million within the second quarter of this 12 months. Globally, user numbers are up about 10% over that stretch and are expected to extend 3% a 12 months through 2024, in response to FactSet estimates.

“I do not see it spiraling by way of money flows in the subsequent few years, but I’m just fearful that they don’t seem to be winning the subsequent generation,” said Jeremy Bondy, CEO of app marketing firm Liftoff.

Sales growth is anticipated to hover in the only digits for the primary half of 2023, before ticking back up. But even that bet carries risks. The following generation, as Bondy describes it, is now moving over to TikTok, where users can create and look at short, viral videos reasonably than scrolling past political rants from distant relatives with whom they mistakenly connected on Facebook.

Meta has been attempting to mimic TikTok’s success with its short video offering called Reels, which has been a significant focus across Facebook and Instagram. Meta plans to extend the quantity of algorithmically really helpful short videos in users’ Instagram feeds from 15% to 30%, and Bondy speculates the corporate will likely “get tremendous revenue flow from that” algorithmic shift.

Nevertheless, Facebook acknowledges it’s early days for monetizing Reels, and it is not yet clear how well the format works for advertisers. TikTok’s business stays opaque because the corporate is privately held and owned by China’s ByteDance.

Sheryl Sandberg, who’s leaving the corporate Friday after greater than 14 years as chief operating officer, said in her final earnings call in July that videos are harder than photos by way of ads and measurement, and that Facebook has to indicate businesses how one can use the ad tools for Reels.

“I feel it’s extremely promising,” Sandberg said, “but we have got some exertions ahead of us.”

Skeptics corresponding to Martin see Facebook pushing users away from the core news feed, where it makes tons of money, and toward Reels, where the model is unproven. Martin says Zuckerberg must know something vital about where the business is headed.

“He would not be hurting its revenue at the identical time he needs more cash, unless he felt just like the core business wasn’t strong enough to face alone,” Martin said. “He must feel he has to try to maneuver his viewership to Reels to compete with TikTok.”

A Facebook spokesperson declined to comment for this story.

Zuckerberg has at the very least one major reason for concern beyond just stalled user growth and a slowing economy: Apple.

The 2021 iOS privacy update, called App Tracking Transparency, undermined Facebook’s ability to focus on users with ads, costing the corporate an estimated $10 billion in revenue this 12 months. Meta is counting on artificial intelligence-powered promoting to eventually make up for Apple’s changes.

That will amount to little greater than a Band-Aid. Chris Curtis, a web-based marketing expert and consultant, has seen social networks rise and fall as trends change and users move along. And that problem is not solvable with AI.

“I’m sufficiently old, and I used to be there when MySpace was a thing,” said Curtis, who previously worked at Anheuser-Busch and McKinsey. “Social networks are switchable, right?”

Whenever you have a look at Meta’s user numbers, Curtis said, they suggest the corporate is “not in a superb position.”

‘Force for good or evil’

The last time Facebook’s market cap was this low, it was early 2019 and the corporate was coping with the continued fallout of the Cambridge Analytica privacy scandal. Since then, Facebook has suffered further reputational damage, most notably from the documents leaked last 12 months by whistleblower and former worker Frances Haugen.

The foremost takeaway from the Haugen saga, which preceded the name change to Meta, was that Facebook knew of lots of the harms its products caused kids and was unwilling or unable to do anything about them. Some U.S. senators compared the corporate to Big Tobacco.

Former Facebook worker and whistleblower Frances Haugen testifies during a Senate Committee on Commerce, Science, and Transportation hearing entitled ‘Protecting Kids Online: Testimony from a Facebook Whistleblower’ on Capitol Hill, in Washington, U.S., October 5, 2021.

Jabin Botsford | Reuters

Denise Lee Yohn, writer of brand-building books including “What Great Brands Do” and “Fusion,” said there’s little evidence to suggest that Facebook’s rebranding to Meta late last 12 months has modified public perception of the corporate.

“I feel the corporate still suffers from lots of criticism and skepticism about whether or not they are a force for good or evil,” Yohn said.

Rehabilitating a damaged brand is difficult but not inconceivable, Yohn said. She noted that in 2009, Domino’s Pizza was in a position to successfully come back from a crisis. In April of that 12 months, a video made as a prank by two restaurant employees went viral, showing one in every of them doing disgusting acts with food while cooking in one in every of the corporate’s kitchens. Each employees were arrested and charged with food contamination.

In December 2009, Domino’s launched a marketing blitz called the “Pizza Turnaround.” The stock climbed 63% in the primary quarter of 2010.

Yohn said the corporate’s approach was, “We have been told our pizzas suck, and so we’re actually going to make substantive changes to what we’re offering and alter people’s perceptions.” While it sounded initially like “just marketing speak,” Yohn said, “they really really did change.”

Zuckerberg, however, is just not “coming across as a pacesetter who’s serious about changing his culture and about changing himself and about sort of creating an organization that can have the opportunity to step into the long run that he’s envisioning,” she said.

Meta’s reputational hit could also harm the corporate’s ability to recruit top-tier talent, a stark contrast to a decade ago, when there was no more prized landing spot for a hotshot engineer.

A former Facebook ad executive, who spoke provided that his name not be used, told CNBC that regardless that TikTok is owned by a Chinese parent, it now has an edge over Meta relating to recruiting since it’s viewed as having less “moral downside.”

Ben Zhao, a pc science professor at University of Chicago, said he’s seeing that play out on the bottom as an increasing number of scholars in his department are showing interest in working for TikTok and ByteDance.

To be able to stay competitive, given how the market has punished tech stocks this 12 months, Zhao said, Meta and Google are “having to pay more and are having definitely handy out more lucrative stock options and packages.”

The bull case

Still, Zuckerberg has a history of proving his doubters fallacious, said Jake Dollarhide, the CEO of Longbow Asset Management in Tulsa, Oklahoma.

Dollarhide remembers when investors ran from Facebook not long after its 2012 IPO, scoffing at the corporate’s ability to maneuver “from the PC to the mobile world.” Facebook’s mobile business quickly caught fire and by late 2013, the stock was off to the races.

Zuckerberg’s success in pivoting to mobile gives Dollarhide confidence that Meta can money in on its bet-the-farm move to the metaverse. Within the second quarter, Meta’s Reality Labs division, which houses its virtual reality headsets and related technologies, generated $452 million in revenue, about 1.5% of total Meta sales, and lost $2.8 billion.

“I feel Zuckerberg could be very vivid and really ambitious,” said Dollarhide. “I would not bet against Zuckerberg identical to I would not bet against Elon Musk.”

Dollarhide’s firm hasn’t owned Facebook shares, though, since 2014, preferring the trajectory of tech corporations corresponding to Apple and Amazon, two of his top holdings.

“The truth is that they could be perceived as a worth company and never a growth company,” Dollarhide said, regarding Meta.

Irrespective of what happens in the subsequent 12 months or two and even three, Zuckerberg has made clear that the long run of the corporate is within the metaverse, where he’s banking on recent businesses forming around virtual reality.

Meta could grow the metaverse, but there's a long road ahead, says Jefferies' Brent Thill

Zhao, from University of Chicago, says there’s immense uncertainty surrounding the metaverse’s prospects.

“The actual query is — are each day users ready for the metaverse yet?” Zhao said. “Is the underlying technology ready and mature enough to make that transition seamless? That is an actual query and that is probably not all as much as Facebook or Meta at this point.”

If Zuckerberg is true, perhaps 10 years from now Meta’s stock price from the depths of 2022 will appear to be the discount of the last decade. And if that happens, predictions of a death spiral will likely be mocked like a 2012 cover story from Barron’s, headlined “Facebook is value $15” with a thumb pointing down. 4 years later, it was trading near $130.

WATCH: Needham’s Martin is a Meta skeptic

I'm not sure there's a core business at Meta that works anymore, says Needham's Martin

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