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Investors Business Daily

Is The Sun Setting On The Glory Years For Facebook And Meta Stock?

As Facebook turns 18 years old this year, the longtime whiz kid of social media is embarking on a new life under the name Meta Platforms. But the company is struggling with its newfound maturity, and Wall Street is fretting over the metaverse stock like a worried parent.

Meta stock has lost more than half its value since last September, as Facebook and Chief Executive Mark Zuckerberg have tethered the company's future to the metaverse, an entirely new method of communicating.

The risky bet comes as troubles mount at the company. User growth is stalling, and advertising revenue is under pressure due to competition and the slowing economy. The company faces increasing scrutiny from Congress, while upstarts are challenging its social media dominance. And while Facebook sees massive potential in the metaverse, there's no guarantee its gamble will pay off.

On Monday, Needham analyst Laura Martin downgraded Meta to a rating of underperform, from hold, based on "deteriorating fundamentals" and "valuation risks, among other reasons.

"We believe investors should remain on the sidelines while they assess several long-term valuation risks," Martin wrote in a note to clients. The valuation risks include competition, consumer behavior shifts, regulatory risks and metaverse investment risks.

Meta stock dropped 4.7%. closing at 162.88, on the stock market today.

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As Meta's latest quarter closed June 30, founder Zuckerberg reportedly told staffers on a conference call that the company faces one of the "worst downturns we've seen in recent history" when it comes to Facebook's current status amid a troubling economy, according to the New York Times.

Zuckerberg said the economy's downturn means Meta Platforms now plans to bring on 6,000 to 7,000 new engineers this year, down from a previous goal of around 10,000.

Leaving Some Workers Behind?

He also raised eyebrows by encouraging employees to reexamine their ties to Facebook. He and other Meta executives noted the transition to becoming a metaverse company will require new skill sets. That is likely to leave some workers out of place in a difficult economy.

"I think some of you might decide that this place isn't for you, and that self-selection is OK with me," Zuckerberg said on the call, according to transcripts received by the Times on July 1. "Realistically, there are probably a bunch of people at the company who shouldn't be here."

The Times went on to quote Chris Cox, Meta's chief product officer, who said in a memo to employees that he expected some turnover due to the company's new priorities in a tough situation.

"We need to execute flawlessly in an environment of slower growth, where teams should not expect vast influxes of new engineers and budgets," Cox's memo said, according to the Times.

Meta Stock Follows A Downward Trajectory

Facebook long has been a major tech player, known as one of the vaunted FANG stocks that seemed invincible. Even as Congress hauled Facebook into hearings in recent years over antitrust issues and concerns about social networks harming children, Meta stock continued to rise. Not anymore.

Not long before Facebook announced its new identity as Meta Platforms in October — a move meant to highlight its commitment to the metaverse — the stock started to drop. Since then it has lost five years of price gains, trading recently at 2017 levels.

The biggest gut punch came Feb. 3, the day after Meta released fourth-quarter results. Not only did Facebook miss key Q4 numbers, its outlook fell short of expectations. Facebook shocked investors normally accustomed to stellar financial reports, and Meta stock plummeted more than 26% that day.

Zuckerberg acknowledged problems when Meta reported the results.

"Although our direction is clear, it seems that our path ahead is not quite perfectly defined," he said during the earnings call.

Meta's Relative Strength Rating stands at an abysmal 17 out of a best-possible 99, meaning it has lagged 83% of all stocks in the past year. Meta stock's overall Composite Rating, which reflects both fundamental and technical performance, is just 39 out of 99. Since hitting a record high of 384.33 in September, shares have tumbled about 56%.

Challenges Facing Meta Stock And Mark Zuckerberg

From an investor's viewpoint, a big problem is that Facebook earnings have grown at a slower pace than revenue, says Louis Navellier, chairman and founder of Navellier & Associates.

Analysts polled by FactSet see second-quarter revenue coming in flat compared with the year-ago period, at $29.1 billion. But they also forecast a 28% earnings decline. Earnings fell 18% in the first quarter, the apparent result of a deeper-than-expected economic downturn.

"When you look at a company, you want the earnings growing faster than sales," Navellier told IBD. Analysts have cut their Meta stock targets to 262 a share, from 283, apparently unconvinced the company can return to its September peak anytime soon.

All this comes as Facebook is starting to feel the sting of competition from a number of sources.

Companies Mark Zuckerberg Must Watch

Upstart social media app TikTok bears watching. The smartphone app lets users post short-form videos submitted by other users or post such videos themselves. The clips typically run for about 20 to 30 seconds.

TikTok has siphoned away Facebook users and ad revenue. Zuckerberg has said TikTok, owned by Beijing-based ByteDance, is one of the most effective competitors his company has ever faced.

TikTok reached 1 billion monthly active users in January, according to Statista. Its core user base consists of teenagers and people in their 20s, a highly desirable segment.

Facebook is still atop the heap in social media with 2.9 billion monthly users, but the YouTube unit of Google-parent Alphabet claimed 2.56 billion monthly active users at the end of 2021, Statista says.

Snap's Snapchat service had 557 million users while Twitter had 436 million. Snap reports quarterly earnings late Thursday Twitter reports Friday

Snap, which operates much like TikTok, competes with Meta for ad dollars. So do Etsy, Pinterest, Amazon and Alphabet.

Facebook Daily Users Decline For First Time

A look at different stats indicates Meta's core product — the Facebook news feed — has sputtered and stalled. For the first time since its founding in February 2004, daily users in the fourth quarter were roughly flat with the previous quarter, at 1.93 billion, Facebook said. Some reports indicate daily users might have dipped slightly.

The metaverse stock managed to regain some daily users in the first quarter, ticking up to 1.96 billion. But Meta expects to show a drop for the second quarter. Moreover, Meta expects revenue growth, at the midpoint of its expected range, to be flat. That's the lowest guidance in company history.

The repeated thumps Facebook received over many years finally may be making it stagger. Facebook has faced advertiser and user boycotts and bans in authoritarian countries. It took blame for spreading misinformation and hateful posts and enabling election interference that created social fissures within cultures and societies.

As these distractions occurred, young companies in the social networking field, such as TikTok and Snap, began to outperform Facebook in user growth.

Should Mark Zuckerberg Fear Congress?

While Meta stock seemed to brush off government oversight in the past, that may be tough to do now, says Karsten Weide, a vice president of digital media and entertainment at research firm IDC.

"More privacy regulation could really hurt Facebook," Weide told IBD. "It could make it harder for Facebook to track consumers and cut into ad revenue as a result."

Indeed, Facebook has lost billions in revenue since Apple made changes to its operating system that allow users to opt out of tracking. Google said it plans to take similar steps at the end of next year.

"It's going to get more difficult for Facebook to work around these developments and thereby slow revenue growth," Weide said. "And it's a reason why Meta is looking ahead of the curve at the metaverse, to jump ahead of the pack."

Mark Zuckerberg Looks To The Metaverse

The move to the metaverse amounts to one of the most drastic moves at the company since 2012, when Zuckerberg said Facebook would shift its social network away from desktop computers and into mobile devices. At that time, the change was hugely successful, leading to years of rapid growth in revenue and gains for Meta stock.

This new shift reflects the company's growing ambition beyond social media toward new ways of communicating and interacting on the internet as a metaverse stock. It comes as Meta is spending billions to help create that new world.

The metaverse promises to incorporate 3D synthetic worlds using technologies such as virtual reality and augmented reality. It presents both a virtual playground and a place to conduct business.

"Clearly, Zuckerberg's betting the ranch on the metaverse," said Navellier, the money manager, of the Meta CEO. "Wall Street's obsession right now with Facebook is that everybody wants to see the metaverse take off. But we just don't know when the inflection point is."

If the metaverse succeeds and Meta holds the lead, he said, "I'm sure the stock will double."

Metaverse Stocks: A Multitrillion-Dollar Economy?

Definitions of the metaverse differ. But experts generally see it as a path to a third generation of the internet, well beyond the current Web 2.0. Analysts expect to see metaverse stocks make investments in the tens of billions of dollars.

Capitalizing on this vision comes with high risk but potentially very high reward, analysts say. They believe the metaverse could become a multitrillion-dollar economy. That value includes products and services derived from what is referred to as Web3 technology — the building blocks of the metaverse.

Goldman Sachs analyst Eric Sheridan estimates that global investments in the metaverse could easily exceed $100 billion and lead to a digital economy that could get as high as $8 trillion on the revenue and monetization side. But it could be five to 10 years away.

Meta had planned to initially spend more than $10 billion on developing the metaverse, with billions more down the road. But the company recently announced that it will slow down the pace of investments to boost profit.

Halting Projects To Shore Up Profit

Meta put many projects on hold or canceled them in an effort to improve profitability.

In June, Meta halted development of a camera-equipped smartwatch. But Facebook continues to work on other wearable devices.

In addition, the company is said to have scrapped plans for the commercial launch of its first augmented reality glasses, which were in development for three years, according to a report by The Information. It planned to launch the glasses commercially in 2024. Facebook is shifting its focus to a later version of the AR glasses.

Meta will also shift strategy for its video-calling Portal smart display toward business use, according to The Information. The first generations of the product targeted consumers.

Cost cuts played a role in the company's decision to halt development projects. Meta executives said on an earnings call in April that the company would trim annual expenses by $3 billion this year given the broader business slowdown.

Mark Zuckerberg Fights A Two-Front War

Meanwhile, Facebook is fighting a two-front war. As it ventures into the metaverse, it's still trying to hold the line on social media.

As part of its transition, last year Meta announced a new financial reporting structure consisting of two sectors. One sector, called Family of Apps, includes detailed data on Facebook, Instagram, Messenger, WhatsApp and other services. It accounts for almost all of Facebook's revenue today.

Facebook Reality Labs makes up the rest. That's the metaverse side of the company. This category includes augmented and virtual reality hardware, software and content.

But changing the direction of Meta today is far more challenging than in times past. One reason is its size. Meta has roughly 78,000 employees.

"Over the next several years, our goal from a financial perspective is to generate sufficient operating income growth from Family of Apps to fund the growth of investment in Reality Labs, while still growing our overall profitability," Zuckerberg said. "It's still early, but as we build out the experience, the next focus will be on growing the community."

Meta Stock And Others Face Ad Slowdown

Meanwhile, Meta and all the major social media stocks have struggled during the current slowdown in advertising.

RBC Capital Markets analyst Brad Erickson reduced his price targets on Meta, Google, Pinterest and Amazon in late June. He lowered estimates on Snap in the previous month.

The reduction in estimates for the metaverse stock came after RBC examined ad spending expectations among small and midsize businesses.

"Bottom line, we found clear signs of cracks forming on overall spend, though interestingly, (small and midsize business) weakness seems very much yet to fully run its course, indicating potentially more persistent risk to second-half estimates," Erickson wrote in a note to clients.

Less Room For Upside On Meta Stock

Among other things, he said several respondents to the RBC survey called out a general slowdown in e-commerce growth as a "pull forward" effect from Covid. He thinks ad growth could be in the single digits not just for the next few quarters but the next few years.

That means less room for upside in the stocks until signs of budget stability among advertisers can be found and better visibility around reacceleration materializes, he said.

In a recent note, Loop Capital analyst Alan Gould said the bull-bear debate on the metaverse stock will remain unchanged.

"Bulls will continue to focus on (Meta's) valuation trading at a discount to the market on an earnings basis," he said. "Bears will focus on the growing competition, metaverse spending, potential regulation and impact of platform changes."

Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.

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