What's Going Wrong With Social Media?

Investors expected to see Meta Platforms lay out a map to the metaverse this evening. Instead, they were shown a road to earnings hell.

Shares of the company formerly known as Facebook tumbled more 22% in after-hours trading. That would translate to a loss of market value of more than $175 billion. If the decline is maintained in tomorrow's opening, it would mean that the stock has slid 35% from its record close set on Sept. 7.

The trigger for tonight's selloff was the company's forecast that revenue growth in the current quarter could be as low as 3%, a sharp deceleration from a gain of 48% in the quarter a year ago. 

Meta pointed to a number of headwinds, including the impact of privacy changes in Apple's iOS mobile software. (The word "headwinds," by the way, appears 22 times on the company's earnings conference call.) 

Facebook's daily active users slipped to 1.929 billion in the fourth quarter from 1.930 billion in the third quarter. The upshot is, as Eric Savitz, Barron's Tech Trader columnist, wrote this evening, that "people seem to be spending less time on Meta’s platforms, which include Facebook, WhatsApp, Instagram, and Messenger. "

And that presents a number of significant worries for investors, Eric pointed out: 

That forecast raises questions not just about Meta’s growth outlook but about the broader online advertising industry and shifting consumer behavior. It would appear that Meta is seeing serious issues in its core business—decelerating use of the company’s primary services, tough earnings comparisons, and reduced spending by advertisers who are having issues related to inflation and supply-chain issues. 

The tumble in the stock price, wrote Alex Heath at the Verge, "shows that Facebook’s corporate rebrand to Meta isn’t enough to distract investors from the problems in its core business of social media."

Yet those problems may be saying something broader about social media use. Does it reflect a behavior change as the pandemic eases up and people get off their computers and phones? Shares of Snap, Twitter, and Pinterest also fell sharply in after-hours trading. Even Alphabet was down 1.7% not long after being the market leader for the day. More insights into social media use may come when Snap reports quarterly results tomorrow.

Eric raised two big questions: 

Are consumers reducing their use of social media, in general, or just Meta’s platforms, in particular? And are advertisers actually cutting back on spending, or just shifting dollars away from platforms like Facebook’s which have historically been reliant on the user-targeting Apple is now trying to prevent?