Last week saw Meta, Facebook’s parent company, lose more than $230 billion of its market value, an all-time record one-day fall for any stock. What exactly happened at Meta that caused the record share price fall?
Frank Thormann, Global Equities Fund Manager: “Expectations for Meta’s fourth quarter earnings results were very high, not least because its largest competitor Alphabet, Google’s parent company, reported really excellent financial results just a few days before.
“As it turned out, the results were disappointing on a number of fronts and actually quite worrying.”
Alex Tedder, Head of Global Equities: “The results confirmed that Facebook is starting to slow down. We’re seeing a definite deterioration in engagement as people are using Facebook less. The number of daily active users fell in the last three months of 2021 for the first time ever.”
Where are users going?
AT: “The younger demographic, those aged 18-24 years old, are going elsewhere. Research shows that only 27% of teenagers use Facebook every day, down from 94% in 2012.
“They’re now using competitors like TikTok, a short-form video-sharing app, which Mark Zuckerberg, Meta’s CEO, acknowledges is a real threat to the outlook for Facebook and probably for Instagram too.”
FT: “TikTok’s popularity is surging rapidly, particularly among the younger generations, as measured by app downloads and time spent on the platform.”
What about the changes in privacy settings that have come into effect?
AT: “This is another reason for the share price performance of Meta last week. For the coming quarter, Q1 2022, Facebook has acknowledged that changes in privacy settings will hit their revenues hard. In many cases, they will no longer be able to track how their users move around the internet and sell that data to third parties, like advertisers, who use this type of information to place targeted ads.”
FT: “Meta is investing heavily to try to circumvent the privacy issues it faces and to improve its competitive position against rivals like TikTok. For example, it has allocated over $10 billion per year in spending to develop its metaverse – virtual and augmented reality – capabilities. So revenues are slowing materially while spending is pushing up costs – the result is a severe and much worse-than-expected decline in profitability.”
What does the share price move say about investors’ views on the metaverse?
AT: “I think it shows how sceptical investors are about the metaverse and the ability of a company like Facebook to migrate its business model to a virtual reality platform (which is essentially what the metaverse is). The jury is very much still out on that. As a team, we’re not convinced it’s going to work in the way Mark Zuckerberg is suggesting . We think there are some very real grounds for doubt and that puts a lot of uncertainty into the equation for the future growth of Facebook at this point.”
Some tech stocks have been hard hit and others, like Google and Amazon, haven’t. Why?
FT: “Bear in mind that the NASDAQ has doubled from the lows of March 2020, which is an unprecedented move by historical standards. I would characterise a 10% decline as a small correction but it’s something investors ought to take seriously. It’s clear that the rising tide is no longer lifting all boats.
“Some of the correction can be explained by rising interest rates, which I think is underestimated by the investment community. Companies that are assessed by investors on the basis of their future growth – such as tech companies – tend to do less well in an environment of rising interest rates.”
AT: “While companies like Google and Amazon aren’t immune from some of the issues that plague Facebook, they don’t have business models that are driven by social media and sodon’t face the significant ethical and legal challenges that Facebook does. Google’s results for the fourth quarter showed that user growth is robust and pricing in its core advertising business remains strong. Amazon also displayed strong pricing power in its most recent set of results – it’s increasing the price of its Prime membership for the first time in four years.”
Taking all this into account, what’s your outlook for the sector and other growth stocks?
AT: “Clearly there are challenges for the type of disruptive growth companies that we tend to have a preference for, especially in the short term. We’re focused on those that generate profits and cash flow – those with strong pricing power as a result of their leading market positions. We think these types of companies will continue to do well in 2022.
“The tech sector as a whole, particularly those companies which are currently profitless, may well find itself out of favour this year as investors look for opportunities in previously un-loved – and therefore lowly valued – parts of the market, like the energy sector. That is likely to continue this year and beyond as interest rates rise. However, t what we don’t want to do is lose sight of the long-term picture, which is that we are living in a world that is transforming. Trends such as the energy transition, digitalisation, focus on sustainability and changing consumer preferences have not gone away and are, arguably, getting more and more powerful with time.
“If we have more of a reset in some of these growth areas, that will present some tremendous opportunities for investors like ourselves. So that’s really where we’re at: there are shorter- term headwinds for many of these growth names, but longer term, the outlook is still very good.”