What was the reason for the steep fall in the shares? Is the metaverse not profitable?
the story So Far: Shares of Meta Platforms, the parent company of social media giant Facebook, crashed as much as 25% on Thursday, wiping more than $200 billion off the company’s market value. The crash came as Meta announced its 2021 fourth quarter earnings results on Wednesday, which didn’t impress investors. The 25% drop in Meta Shares is its biggest drop since its launch in 2012.
Summary
- Shares of the Meta Platform fell up to 25% on Thursday, wiping out more than $200 billion from the company’s market value. This was triggered after Meta released its quarterly earnings statement last week informing investors that Facebook lost half a million active users during the fourth quarter.
- Meta makes most of its revenue through advertising and the decline in Facebook’s number of active users is seen as a big red flag. In addition, changes to Apple’s privacy policy have given iPhone users the option to opt out of being tracked by sites like Facebook. This has made it difficult for Facebook to show targeted ads to users. Meta is expected to lose about $10 billion in revenue in 2022 due to Apple’s new privacy policy.
- Investors have also been uncertain about Meta’s future as the company tries to rediscover itself. In fact, just last year Facebook renamed itself as the Meta Platform to highlight its new immersive virtual experience through the Metaverse. However, the success of the company’s new pivot is far from certain and is expected to take years to come to fruition and cost billions of dollars.
Why do stocks go up or down?
A stock’s price typically reflects investors’ expectations about the future cash flows they can earn from the stock. This is the reason that if investors expect these companies to make significant profits in the future, then even the shares of loss-making companies can go up significantly. At the same time, established companies that generate billions for their shareholders can still see their stock prices tank if investors’ expectations about these companies’ future earnings start to sour. Since expectations about a stock’s future earnings can change in a matter of seconds or less, there is a risk of a sudden jump or fall in share prices, as was the case with Meta’s stock last week.
Why exactly are investors concerned about Meta’s future earnings?
Last week Meta’s quarterly earnings statement informed investors that Facebook lost half a million active users during the fourth quarter. This is the first time that Facebook has seen a decline in its active user base, leading analysts to believe its long growth story may be over. Meta CEO Mark Zuckerberg, who lost nearly $20 billion of his personal wealth due to the crash, said the company’s rival TikTok was a growing threat to his business. There are also concerns about the demographics of Facebook users as younger users prefer Facebook over other competing platforms.
Meta makes most of its revenue through advertising and the decline in Facebook’s number of active users is seen as a big red flag. It should be noted that Meta reported an overall increase in active users, thanks to the popularity of its other platforms such as Instagram and WhatsApp. But analysts believe that it will be more difficult for Meta to monetize its user base through these new platforms.
Another area of concern for investors has been the stability of Meta’s ad revenue. Recently, a change to Apple’s privacy policy has given iPhone users the option to opt out of being tracked by sites like Facebook. This has made it harder for Facebook to know what its users do online and use this information to make money by showing them targeted ads for which advertisers are willing to pay. Meta is expected to lose about $10 billion in revenue in 2022 due to Apple’s new privacy policy.
Investors have also been uncertain about Meta’s future as the company tries to rediscover itself. In fact, it was only last year that Facebook renamed itself as a meta platform to highlight the shift in its focus, from providing users with a traditional social media experience to a new immersive virtual one through the Metaverse. to provide experience. However, the success of the company’s new pivot is far from certain and is expected to take years to come to fruition and cost billions of dollars. Some say investors’ volatile confidence was reflected in Meta’s share price even before Thursday’s crash. Meta’s shares are down nearly 40% since reaching their peak in September last year.
what lies ahead?
No one knows what will happen next for the company. Meta invested more than $10 billion in developing the Metaverse last year, and only time will tell if that investment is justified.
Since the company adjusts this investment as an expense against its current revenue, it is likely to have an adverse short-term impact on its profits and impact on its share price.
It should also be noted that the technology business with its low barriers to entry has traditionally seen a lot of churn with large companies that once enjoyed a strong monopoly to be overthrown by newer, more agile entrants. .
For example, Facebook became the most popular social networking site by beating Orkut, which was once very popular among Internet users.
Google’s Yahoo! Another example of creative destruction from the search engine business is widespread in the technology market.
The fall in the price of Meta Shares will reflect all these uncertainties in the days to come.
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