Meta Platforms, Inc. (FB) is the world’s largest social media network, providing some of the most popular applications to connect and communicate online, such as Facebook, Instagram, Messenger, WhatsApp, and Oculus, which makes virtual headsets for gaming and entertainment. The main revenue source for Meta Platforms comes from the advertising business.
The corporate rebrand to Meta Platforms, from the previously named Facebook, comes at a time when investors need to consider three different factors that could impact the business prospects of this leading social media empire. I am bearish on FB stock considering all three of these factors. (See Analysts’ Top Stocks on TipRanks)
Mixed Q3 Results
Meta Platforms reported better-than-expected third-quarter earnings, but missed estimates on revenue. The social media and technology company reported earnings of $3.22, versus $3.19 per share expected by analysts. Revenue reported was $29.01 billion, versus the expected $29.57 billion. Meanwhile, the daily active users (DAUs) reported figure of 1.93 billion came in-line with consensus, and monthly active users (MAUs) were weaker-than-expected, coming in at 2.91 billion vs. 2.93 billion.
Additionally, the average revenue per user (ARPU) also was weaker-than-expected, with a figure of $10 compared to $10.15.
The positive news is that Meta Platforms announced a $50 billion increase to its share buyback program. The company said that they “repurchased $14.37 billion of our Class A common stock in the third quarter and had $7.97 billion remaining on our prior share repurchase authorization as of September 30, 2021.”
Although this is good news for the intrinsic value of FB stock, a deceleration in revenue growth, which has been present for three consecutive years, is a cause for concern. The 2018, 2019 and 2020 data shows that revenue growth was 37.35%, 26.61%, and 21.60%, respectively. In absolute numbers, revenue continues to grow, but this growth is losing momentum.
During its earnings call, Meta Platforms attributed the decline in revenue to changes Apple (AAPL) made to its iOS 14.5 privacy options. Apple allowed its users to opt-out of apps tracking them across the web, resulting in lower conversion rates for advertisers, and lower advertising revenue consequently for Meta Platforms.
Bearing this in mind, Meta Platforms will have to spend and invest in its targeting system related to the advertising business and improve the algorithms.
Pivot Toward the Metaverse
The decision to rebrand from Facebook to Meta Platforms is a major business decision. CEO Mark Zuckerberg considers the metaverse to be a “successor to the Internet.” But what is a metaverse? A metaverse is a completely digital world in which multiple people can interact within a 3D environment, create avatars, and engage in activities such as entertainment, gaming, and online shopping.
It is difficult to say if other social media platforms will follow Meta Platforms’ example and pivot toward a metaverse-centric business model, but until widespread adoption occurs, it remains a considerable risk.
An Ethical Accusation
Meta Platforms has recently faced a PR crisis after a whistleblower publicly testified to U.S. lawmakers, accusing the company of putting “profits before people.” Numerous leaked documents were published which suggested the Facebook algorithms had been drawing users toward circles of hate and misinformation.
Zuckerberg has defended the practices of his firm by stating that the testimony was “a coordinated effort to selectively use leaked documents to paint a false picture of our company.”
This is hardly the first high-profile controversy in which FB has been embroiled. Headlines were published in 2017 alleging that political consulting and strategic communications firm Cambridge Analytica had collected personal information from about 87 million users on Facebook. This data security breach may now have been left behind by the investment community, but the ethical track record of FB has only seemed to garner more and more negative media attention.
Putting profit over public safety is a dangerous game to play. Meta Platforms has announced that it will soon remove advanced targeting options which involve sensitive topics. These issues can include health, race, religion, ethnicity, and political affiliation.
Wall Street’s Take
On TipRanks, Meta Platforms has an analyst consensus rating of Strong Buy, based on 29 Buys, 6 Holds, and 1 Sell rating. The average Meta Platforms price target of $405.59 implies a 12-month 18.98% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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