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Meta Platforms ( FB ) reported 4Q21 revenue of $33.7 billion (+20% YoY) that beat Street consensus and 2021 full year revenue of $118 billion (+37% YoY) and EPS of $13.77 (+36% YoY). Solid results, but investors drove shares down >20% post earnings due to a disappointing 1Q22 guide that calls for just 3%-11% revenue growth as management reiterated the impact of iOS privacy changes and ongoing macroeconomic challenges such as inflation (highest level since 1982) and supply chain disruptions. While some may see the drop as a rare opportunity to buy the stock, I believe investors may be stepping into a value trap for 5 fundamental reasons. Reason #1 – User growth may have peaked.
In 4Q21, Meta reported DAUs (Facebook + Messenger) of 1.93 billion, the first QoQ decline in company history. This may seem unsurprising to some as Facebook blue has been around since 2004 and Instagram is commonly understood as the next leg of growth, however total family daily active people (DAP), which include Facebook, Messenger, Instagram and Whatsapp, saw only a 0.4% QoQ increase from 2.81 billion to 2.82 billion. Based on a sequential QoQ decline in DAP over the last few quarters, investors should easily come to the conclusion that user growth may have seen its best days. Company data Company data As with any platform that has reached its maturity, ARPU becomes the next value driver but the market may revaluate the growth story at some point. While family average revenue per person (ARPP) did see a 9% YoY growth in 4Q21, I believe investors will begin to question (if not already) the sustainability of ARPP expansion should user growth continue its downward trajectory. For perspective, Roku ( ROKU ) saw a 49% increase in ARPU in 3Q21, but it was not enough to soothe investors’ concern that active account growth has slowed on a QoQ basis. Reason #2 – Facebook Reels face significant competition especially from TikTok.
Meta plans to keep users engaged on its platform by investing heavily in Facebook Reels, which are essentially short-form videos that users can scroll through endlessly. Though Reels currently monetize at a lower rate than Feed and Instagram Stories, management believes this should pick up after several quarters of investment. While the transition to Instagram Stories in 2018 was quite successful, Meta faces a much more difficult competitive landscape today where alternatives such as TikTok (mentioned several times by CEO Mark Zuckerberg during earnings) YouTube Shorts ( GOOG ) and Snap ( SNAP ) exist.
Per SensorTower, TikTok is the first non-Facebook app to have reached 3 billion downloads globally. In the U.S., TikTok DAUs rose 13% YoY to 48 million in 2021, while the average time spent per day was up 10% to 87 minutes, the highest among social media peers ( source ). In 4Q21, consumer spending on TikTok more than doubled to $824 million from $382 million in 4Q20. US consumer spending for the quarter was nearly $110 million (+270% YoY) and accounted for 13% of global revenue vs. 29.6 million or 8% of global revenue in 4Q20. Sensor Tower Reason #3 – The Metaverse will continue to weigh on operating margins
Meta is firing on all cylinders in building the Metaverse – a virtual world where users can freely interact with one another. To date, the Oculus Quest store has generated more than $1 billion in revenue and Meta will release a high-end VR later in 2022 while Project Nazare (Meta’s first AR glasses) is in good progress. Horizon, Meta’s social VR world-building experience, is now available in the U.S. and Canada and a mobile version is expected to launch some time this year. Lastly, the Meta Avatars SDK is now open to all Unity ( U ) developers on Quest, Rift, and Window-based VR platforms, so that developers can seamlessly bring Meta Avatars to their own VR experiences.
That all sounds great, except there’s one little problem: the Metaverse won’t be making money for a while.
In 2021, Reality Labs (the business segment responsible for the Metaverse initiative) generated revenue of $2.3 billion and an operating loss of $10 billion (vs. $57 billion in operating income from Family of Apps). Over the past 3 years, the segment has lost more than $20 billion on revenue of just under $4 billion. In an environment where investors are increasingly shifting focus towards profits rather than concepts, a project consuming that much profitability will likely be […]
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