Perspective on Meta’s (formerly Facebook) Stock Dive

On February 2, Meta Platforms Inc (formerly Facebook), reported its quarterly earnings after market hours, leading to a sharp decline in the stock the next day. The Summitry investment team spent several days reviewing these results to determine what, if any, action should be taken.

Google Market Summary: Meta Platforms Inc.

While fourth-quarter results were quite strong, Meta’s management provided weak revenue guidance for the first quarter citing the following headwinds:

• Apple’s privacy changes have reduced the effectiveness of Facebook’s ad targeting and measurement. Management estimated the revenue impact to be around $10 billion or 8% of revenue.
• Competition from other apps appears to be affecting user engagement. Younger users are spending more time on TikTok and less time on Instagram or Facebook.
• Reels, Meta’s short videos product, is growing rapidly but it’s not mature enough to attract as many ad dollars as Facebook or Instagram Stories.

While we are disappointed by the drop in the stock, we want to offer additional perspective, especially as these events resulted in a slew of inaccurate and misleading headlines.

Unraveling the Misleading Headlines

Apple’s privacy changes aren’t new or surprising.

Meta has been preparing for them for several quarters, and we have factored these changes in our earnings outlook since that time. Meta’s management is confident that it can develop workarounds that will minimize the effects of these changes. Moreover, most of Meta’s competitors are facing similar challenges. We believe Meta is best positioned to address these issues and could even win market share if others fail to adjust to the new environment. This will just require some time.

Product transitions aren’t new to Meta.

The company went through several major transitions such as the user shift from desktop to mobile, and more recently, from Feed to Stories. The move to Reels has its own challenges, including a strong competitor in TikTok, but Meta has a playbook and a track record of making these types of transitions a success.

A recurring theme of “Facebook is dead.”

Headlines such as “Facebook is dead” or “Everyone Fleeing Facebook” appear to pop up every several years. The reality is that 2.9 billion people or 37% of the world’s population use Facebook’s apps monthly because of the value it creates for users in connecting with friends, family, groups, and more. Can the number of users double from here? Highly unlikely. But will Meta’s properties stay relevant to billions of users around the world in the foreseeable future? Certainly.

This is not the first time the stock has sold off sharply due to the concerns surrounding the business, and likely won’t be the last. If history is any guide, the strength and resiliency of Meta’s business should prove out over time. Based on the above information and the knowledge we have accumulated over the years of owning the stock, we maintain our belief that Meta remains one of the biggest beneficiaries from large secular trends such as e-commerce and digital advertising.

Contact us to learn more about our unique investment strategy and approach to Bay Area wealth management, or read more insights on our blog.

posted February 15, 2022

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