Meta: Will 2022 be the worst year on record?
Social media has been one of the fastest growing industries over the past two decades and Facebook has led the charge. The number of users on the platform has grown from under 1 billion a decade ago to almost 3 billion today, creating an advertising behemoth that has seen annual sales grow from $5 billion when it went public in 2012 to $118 billion in 2021.
That saw the company, now named Meta and comprised of not just Facebook but Instagram and WhatsApp, join the elite $1 trillion club last year. However, Meta has been among the hardest hit by the selloff in 2022 as it grapples with a myriad of challenges and is now worth just half of that today.
User growth has stalled as consumer behaviour normalises in a post-pandemic world, rampant inflation and fears of a recession have caused businesses to tighten their advertising budgets, increased competition from newer platforms like TikTok are forcing it to adapt, and IDFA changes by Apple have made it much more difficult to target adverts at users and encouraged businesses to shift marketing dollars elsewhere.
As a result, 2022 looks set to be the worst year on record for the company. User growth will grind to its slowest rate on record and Wall Street anticipates both revenue and earnings will fall for the first time since the company went public. Meta has already started cutting jobs as a result, with CEO Mark Zuckerberg stressing that Meta must ‘get more done with fewer resources’ as the era of unabated growth comes to an end.
(Source: Company reports, Bloomberg consensus)
Meta: Why the metaverse must pay off
The tough environment has severely knocked confidence in Meta, which has also muddled its investment case after sharpening the company’s prospects on the metaverse – a virtual space where users can interact with a computer-generated environment and other users. The company describes the metaverse as the ‘next evolution in a long line of social technologies’.
The company is spending big on its metaverse ambitions. Its Reality Labs division that homes its metaverse operations has lost over $16 billion since the start of 2021 alone and it is set to burn through significantly more cash before returning any rewards.
(Source: Bloomberg consensus)
Zuckerberg admits that this is a ‘very expensive undertaking over the next several years’ but believes that this will lead to a major payoff eventually. Investors should prepare to be patient. Reality Labs is set to account for just 2% of Meta’s overall revenue this year and next, and Zuckerberg has said the company is working on ‘laying the groundwork for what I expect to be a very exciting 2030’ to imply investors shouldn’t expect much for years to come.
As far as investors are concerned, the metaverse must reap rewards considering the company is sinking tens of billions of dollars into it. The transition from social media platform to a fully functioning (and more importantly, sustainable and profitable) metaverse operator is no small feat. The fear is that the current Meta – driven by Facebook, Instagram and WhatsApp – is reaching its peak before the metaverse has even taken off.
Meta is still a key platform for advertisers. In fact, more than half of all digital marketing spend goes to either Meta or Alphabet’s Google – but both are slowly losing their grip over the market as the likes of TikTok, Amazon and Walmart all make a bigger push into advertising.
Meta has set expectations high after pivoting itself so heavily toward the metaverse and investors will only become more impatient the longer it takes and more expensive it becomes.
Meta is the current king of metaverse hardware
While it is still early days for the metaverse, there are already optimistic signs that Meta is leading the pack. The metaverse will be driven by a combination of catalysts in both hardware and software, and Meta is already making headway in both.
Much like a mobile phone is now an essential tool needed to interact with the world’s array of digital services, Virtual Reality (VR) and Augmented Reality (AR) headsets act as the hardware portal needed to fully enjoy the metaverse. Only 14 million headsets are forecast to be sold worldwide in 2022, according to International Data Corp (IDC), but Meta investors can take some comfort in the knowledge that the company’s market share stands at over 90% thanks to the Oculus Quest 2. Much like games consoles, most headsets are currently being sold at a loss and companies are trying to reap back money as users spend more on content. It is worth flagging that other aspects of Meta, from video game streaming to ecommerce, are likely to come more into play as the metaverse evolves. The Quest 2 starts at $399.99 following a recent price increase amid rampant inflation, although this still makes it one of the more affordable options on the market considering some are priced at over $1,000.
Meta currently has a monopoly over headsets, which in turn allows it to drive more people to its exclusive content. Competition remains low for now. Its next biggest competitor is Pico, a company owned by none other than TikTok-owner ByteDance, which has a 4.5% share of sales. The remaining fragment of the market is being fought over between other companies such as Chinese firms DPVR and iQIYI (which is listed but controlled by search engine giant Baidu) and Taiwan-based HTC.
Meta plans to leverage its position by launching a new headset named Project Cambria this year. This will be a high-end device designed for professional users and businesses. Zuckerberg has said he expects people to be ‘blown away by this’ and it will undoubtedly demand a higher price tag to make headset sales more sustainable compared to the subsidised ones on offer to the wider market.
Meta: What’s on the Horizon?
Meta is also making progress on software, which is set to be a far more complex and competitive part of the metaverse. Meta’s ambitions are currently underpinned by its metaverse platform named Horizon and a platform that allows users to create and personalise the avatars they use to traverse it. Meta revealed it already had around 300,000 monthly users in early 2022.
While it could be many years before the metaverse truly takes off, Meta plans to launch a web version of Horizon before the end of 2022 that will let people engage with the metaverse without a headset. This will be a big test and gauge the level of early adopters willing to dip their toes in the virtual world. Meta has said it expects this to ‘dramatically increase the number of people who can use Horizon’, although the jury is still out over how popular this will be through a standard screen.
Will Apple enter the metaverse in 2023?
The IDC has said 2023 will be a ‘crucial year’ for the VR and AR industries as existing players like Meta and Pico launch their next generation headsets, but they have reasons to be nervous considering a new major competitor with the power to sweep them away is expected to enter the market.
Apple has long been rumoured to be working on its own headset and undoubtedly poses the biggest threat to Meta’s market-leading position. There have already been reports that affiliates of Apple have filed applications to register ‘Reality One’, ‘Reality Pro’ and ‘Reality Processor’ as names in a number of countries, providing insight into possible names. It also suggests Apple will follow Meta by targeting both the bottom and top end of the market and has sparked speculation that they will be underpinned by Apple’s own operating system.
The bad news for Meta is that Apple is cash-rich and also has a huge pool of customers to target. Meta currently boasts a huge advantage over its rivals thanks to the billions of people that already use its services, but Apple also has the power to thrust its new headset in front of a significant audience in a swift manner. Over 1.2 billion people are using iPhones today, and that number only rises when you take its array of other products into account. Put simply, Meta has led the pack unchallenged thus far, but will undoubtedly see its monopoly weaken if Apple enters.
The good news is that the huge reach of both Meta and Apple should drive adoption and propel the metaverse forward at a faster rate. Plus, Apple does not enter new hardware categories lightly and has stuck to what it already knows since last stretching into a new market when it launched its first wearables in the form of the Apple Watch back in 2015. The launch of a headset would mark Apple’s first foray into a new hardware market for years, and this should give Meta investors confidence that hardware is the place to be.
Meta: Is now the time to buy?
The slump in Meta’s share price has wiped billions of dollars off its valuation as the pandemic-induced boom in online advertising gave way to much tougher macroeconomic conditions this year, and as markets took a weaker growth outlook into account.
However, this means Meta boasts a more rational valuation than its rivals. Meta currently trades at a price-to-earnings ratio of 16.1x based on its forecasted EPS for 2022, lower than the lofty valuations applied to other social media stocks like Twitter at 43.6x and Pinterest at 47.7x. This also compares favourably to Big Tech and other players in the online advertising market, with Alphabet trading at 20.9x forecasted EPS for 2022 and Apple trading at 26.2x, and is also below the overall S&P 500 that currently trades at a ratio of around 20.5x.
Read more: Understanding the PE ratio and how to use it
This year looks set to be the worst on record for Meta, but Wall Street believes the company will bounce back and return to growth in 2023. User growth is expected to remain subdued and Monthly Active Users is forecast to grow 2.9% to breach the 3 billion mark for the first time, while revenue and earnings are both expected to rebound and hit new all-time records, demonstrating markets are confident that the core business can continue to grow and fund its longer-term ambitions.
That suggests the fall seen during the past year could provide an opportunity for those looking to capitalise on any recovery in 2023, or on the metaverse ambitions that are set to play out over the longer-term. However, investors should be cautious on the speed on any potential recovery given how clouded the outlook is and the high likelihood that Wall Street’s expectations will change given how rapidly the economic picture is evolving.
Where next for Meta stock?
Meta shares have collapsed 58% since hitting all-time highs just over a year ago and today trade below where they sat before the pandemic hit in early 2020.
Meta shares have remained in consolidation mode for almost three months, drifting between a ceiling of $183.60 and a closing floor of $157, and even its latest set of earnings released in July failed to provide the catalyst needed for the stock to breakout. That suggests shares will remain constrained within this band until a new catalyst does emerge.
A break above the ceiling would allow it to target $224.30, the May-high that is also in-line with the peak hit shortly before the stock was derailed by the pandemic. In the meantime, it can target the $200 mark to recoup the June-high. Notably, the majority of the 59 brokers that cover the stock see even further upside with an average target price of over $235.
If the $157 floor of the current range collapses, then Meta shares will be on course to fall toward the pandemic-induced lows, first to $154 and then to the trough of $146. Trading volumes have been steadily declining, with the 5-day average volume at time sitting over one-third below the 100-day average, and the RSI remains in bearish territory.
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