Metaplatforms (NASDAQ: META) faces substantial headwinds that are hurting its prospects. Consumers are once again changing the way they interact with social media applications. Change forces meta-platforms to adapt, which may or may not work in the longer term. In addition, Apple (NASDAQ:AAPL) made changes to its platform, making it more difficult for Meta Platforms to collect user data. This cuts into a lucrative source of revenue from serving targeted ads.
Partly because of these headwinds, Meta’s stock is down 58% from its highs. Let’s examine these red flags in more detail to determine what they could mean for investors.
1. From images to video
When Facebook started 18 years ago, people primarily communicated on the platform through posts, replies, and text messages. As cell phone technology improved, including better cameras, publications shifted heavily in favor of photos. More recently, improved internet speeds have once again changed how people post and what people consume on social media. The short video has grown in popularity. On two of Meta’s social media apps, Instagram and Facebook, short videos account for 20% and 50% of the time people spend on the platforms, respectively.
Changes in consumer habits are generally bad news for Meta as it does not yet have a robust suite of developed advertising capabilities. CEO Mark Zuckerberg pointed out during the conference call following the release of its first quarter results that with each transition, the company experiences short-term headwinds while adapting its platform to adapt to the change of use. Zuckerberg also noted that he’s had success with this type of transition before and expects a similar outcome this time around.
That said, Meta only grew revenue by 7% in its first quarter, which ended March 31, the slowest rate of growth in several years. To put that into context, Meta has grown its revenue at a compound annual rate of 41.3% over the past decade. The dramatic slowdown worries investors.
Nonetheless, Meta has attempted to quantify the impact of these changes, making it more difficult to serve targeted ads, leading to an estimated revenue reduction of $10 billion in 2022. Meta’s total revenue in 2021 was $118 billion, so the impact should be significant. , but not catastrophic. Yet if Meta can’t develop a solution to counter this change, its annual revenue could be perpetually $10 billion lower, a red flag for Meta’s future.
Change is risky
In addition to the immediate impacts these red flags have on Meta, there is the added pressure of uncertainty. Typically, when uncertainty is added to a business, so are risks. Investors are generally skeptical of management advice for success in new ventures. Meta was no different, which could explain the company’s stock falling 58% from its peak.
The title could remain depressed until Meta provides proof that it is indeed grappling with these changes.
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Parkev Tatevosian holds positions at Apple. The Motley Fool has positions and recommends Apple and Meta Platforms, Inc. The Motley Fool recommends the following options: March 2023 long calls at $120 on Apple and March 2023 short calls at $130 on Apple. The Motley Fool has a disclosure policy.
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