The Smart Investor
    Facebook Instagram
    Tuesday, August 16
    Facebook Instagram LinkedIn
    The Smart Investor
    • Home
    • About
      • About Us
      • Careers
    • Smart Investing
      • Getting Started
      • Investing Strategy
      • Smart Analysis
      • Smart Reads
    • Special Free Reports!
    • As Featured on BT
    • Our Services
      • Our Services
      • Subscribe now!
    • Login
    • Cart
    The Smart Investor
    Home»Growth Stocks»What Are The Challenges That Facebook is Facing?
    Growth Stocks

    What Are The Challenges That Facebook is Facing?

    Meta Platforms is facing challenges on multiple fronts. Can it overcome them?
    Jeremy ChiaBy Jeremy ChiaApril 11, 20226 Mins Read
    Facebook Twitter LinkedIn Email WhatsApp
    Lady Tapping on Facebook Mobile
    Share
    Facebook Twitter LinkedIn Email WhatsApp

    Let me start off this article by saying that I have a vested interest in Meta Platforms – the company formerly known as Facebook – and I’m still optimistic about its future. But I am also cognizant of the many challenges that the company faces. 

    In light of this, and with the company’s stock price falling hard in recent months, here are some of these challenges and my thoughts on what the company needs to do to overcome them.

    Flattening user engagement

    In the fourth quarter of 2021, the parent company of Facebook and Instagram reported a decline in the number of daily active users. 

    This was the first-ever quarter where daily active users for Facebook ended the quarter lower than where it was at the start of the quarter.

    While the daily active users declined just 1 million from 1,930 million to 1,929 million, it is still a worrying stat. 

    Facebook has built a giant network that has gotten stronger with each additional user. However, a decline in engagement could lead to a vicious cycle. This is because the engagement levels are only as strong as the content that is on the Facebook platform.

    If users leave, it reduces content. Less engaging content results in more users leaving, which in turn leads to even lesser content. This could have a downward-spiraling effect on Facebook. Although the risk of this problem becoming out of control is low, it is still a possibility. 

    Meta Platforms’ CEO and co-founder, Mark Zuckerberg, pointed out during the latest earnings conference call that shifting consumer preference for TikTok has been one of the big challenges for Facebook and is one of the reasons why the daily active user count has declined.

    With Facebook currently contributing a large chunk of Meta Platforms’ overall advertising revenue, this is a real existential problem for the company. 

    I think Zuckerberg and his team have taken some practical steps to address the issue, such as rolling out Facebook and Instagram’s very own TikTok copycat short-form video service, Reels, which has proven to be a major hit. Reels is growing fast and Zuckerberg has even named Reels as “the biggest contributor to engagement growth.”

    There is still a long way to go to compete with TikTok as many people who use both apps tell me that TikTok has better short-form content on its platform. Nevertheless, Meta has the advantage of having a larger user base now and if executed well, Reels will be able to wrestle some of that attention back to Facebook.

    Changes to ad tracking

    With increasing scrutiny towards data protection, there have been significant changes made to prevent the tracking of user behaviour.

    In 2021, Apple released changes to iOS which limited Meta Platforms’ ability to track user behaviour outside of its own 1st-party websites. The changes resulted in a lower ability for advertisers to measure the efficacy of ads.

    This has significantly handicapped Meta Platforms as many Facebook and Instagram marketers depend heavily on ad tracking. Facebook advertisements are often for performance marketing, which is driven by immediate results. Without the ability to track the efficacy of their Facebook marketing campaigns, marketers may lower their net spend on Facebook and Instagram. 

    Meta Platforms’ management said during the latest earnings call that it anticipates the iOS changes to have a US$10 billion revenue impact in 2022. In 2021, Meta Platforms’ total revenue was US$114.9 billion, so US$10 billion is a high single-digit percentage of the company’s overall revenue.

    Although the near term impact is significant, the good news is that management is taking some steps to address the issue. Sheryl Sandberg, COO of Meta Platforms, said: 

    “So when we talked about mitigation, we’ve said there are two key challenges from the iOS changes: targeting and measuring performance. On targeting, it’s very much a multiyear development journey to rebuild our ads optimization systems to drive performance while we’re using less data. And as part of this effort, we’re investing in automation to enable advertisers to leverage machine learning to find the right audience with less effort and reduce reliance on targeting. That’s going to be a longer-term effort.

    On measurement, there were two key areas within measurement, which were impacted as a result of Apple’s iOS changes. And I talked about this on the call last quarter as you referenced. The first is the underreporting gap. And what’s happening here is that advertisers worry they’re not getting the ROI they’re actually getting. On this part, we’ve made real progress on that underreporting gap since last quarter, and we believe we’ll continue to make more progress in the years ahead.”

    There is still a lot of work to do but given management’s long-term track record of excellence, I am optimistic that the team is up for the challenge and has taken the right steps to improve its ad targeting and tracking.

    Rising costs

    Lastly, there will be rising costs due to Meta Platforms’ investments in its metaverse projects. Investors are concerned about the amount of money that the company would be burning on these projects. In 2021, Meta Platforms burned through US$10.2 billion on its “Reality Labs” segment, which houses the company’s metaverse-related projects. Zuckerberg mentioned that he thinks building this segment will cost US$10 billion a year for a few years. Even for a company as large as Meta Platforms, this is a big investment to make.

    Even though Meta Platforms is in good financial shape now, what investors are more concerned about is whether this investment will pay off or would it be better spent on share buybacks, dividends, or other investments.

    I think the revenue potential for the metaverse, if materialised,  is enormous and Meta Platforms is in a good position to win its share of the spoils. But only time will tell if the company can execute. For now, I’m happy to trust Zuckerberg’s vision for the future.

    Final thoughts

    Meta Platforms is facing challenges on multiple fronts. The stock price is currently reflecting that with the stock price well below its all-time highs and down more than 30% year-to-date.

    On a positive note, Zuckerberg and his team have, over the life of Meta Platforms’ existence, overcome numerous other challenges before. The company’s stock is also trading at just 15.5 times trailing free cash flow and the company has US$48 billion in cash and short term investments. 

    This translates to a chunky 6.5% free cash flow yield. At this price, I think the risk-reward potential looks very promising.

    Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.

    Looking to start investing? Our beginner’s guide will show you how to make the best buying decision and make fewer mistakes. Click here to download for free now.

    Follow us on Facebook and Telegram for the latest investing news and analyses!

    Disclosure: Jeremy Chia owns shares of Meta Platforms.

    Share. Facebook Twitter LinkedIn Email WhatsApp

    Related Posts

    ComfortDelGro Declares a Special Dividend: 7 Things You Should Know About the Land Transport Giant’s Latest Earnings

    August 16, 2022

    My Observations On Malaysia’s Payment Ecosystem

    August 15, 2022

    The Investing Checklist of Legendary Growth Investor Phillip Fisher: Part 5

    August 15, 2022
    Facebook Instagram LinkedIn Telegram
    • Careers
    • Disclaimer & Privacy Policy
    • Subscription Terms of Service
    © 2022 The Smart Investor. All Rights Reserved. The Smart Investor, thesmartinvestor.com.sg, an investment education website managed by The Investing Hustle Pte Ltd (Company Reg No. 201933459Z) is not licensed or otherwise regulated by the Monetary Authority of Singapore, and in particular, is not licensed or regulated to carry on business in providing any financial advisory service. Accordingly, any information provided on this site is meant purely for informational and investor educational purposes and should not be relied upon as financial advice. No information is presented with the intention to induce any reader to buy, sell, or hold a particular investment product or class of investment products. Rather, the information is presented for the purpose and intentions of educating readers on matters relating to financial literacy and investor education. Accordingly, any statement of opinion on this site is wholly generic and not tailored to take into account the personal needs and unique circumstances of any reader. The Smart Investor does not recommend any particular course of action in relation to any investment product or class of investment products. Readers are encouraged to exercise their own judgment and have regard to their own personal needs and circumstances before making any investment decision, and not rely on any statement of opinion that may be found on this site.

    Type above and press Enter to search. Press Esc to cancel.