Meta’s Stock had a Rough February (2022), is Facebook’s Push for the Metaverse to Blame?

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By Michael Inouye | 1Q 2022 | IN-6469

Not long after Facebook rebranded as Meta, the company still finds itself mired in controversy. Within the span of a month, (February 2022), Meta saw significant stock price declines. Near-term issues coupled with significant investments into a long-term play (metaverse and AR/VR) has raised flags among investors and speaks to the need for Meta to refocus some of its efforts to bring some elements of the metaverse forward in their roadmap.

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Meta Platforms' Stock Down 20% YoY at Close of February 2022

NEWS


Meta’s stock has taken a beating, dropping nearly 38% of its value at the close of February 2022, just two months removed from the start of the year (Jan 3, 2022)—Meta’s stock is down 44% from a peak in September 2021. Meta’s recent rebranding to reflect its emphasis on the metaverse has led some to question if investors are already souring on the prospects of the metaverse or, alternatively, questioning the company’s ability to profit from this trend. Given the relative proximity of Facebook’s Meta rebranding (announced October 28, 2021) to the change in stock price, one could argue for a cause and effect, but the metaverse play isn’t likely the reason for Meta’s stock declines. Even if there is some negative impact, the reaction to the metaverse play isn’t nearly as significant as Meta’s other problems.  

Meta is facing substantial pressures on several fronts which have contributed far more to the stock declines than a rebrand and focus on the metaverse. These pressures extend to:

  • A litany of controversies, which includes mis/disinformation, how the company moderates content/users, privacy (both related to its commercial activities and workings with government agencies), scandals (i.e., Cambridge Analytica scandal and more recently internal whistleblower Frances Haugen’s allegations the company puts profits above users’ safety), and the company’s size and position within the market as a potential monopoly.
  • An aging user base. Many of the younger generation are not core Facebook users and while they may use Meta owned social networks like Instagram, other regions are already seeing growing numbers of young individuals who have never used any Meta sourced platform. Competition from others like ByteDance (TikTok) are shifting the competitive landscape.
  • Changes to the privacy landscape. Meta called out Apple’s changes to its IDFA (Advertising Identifier) and the negative impact on its revenue. Relatedly, Meta has also called out concerns over Europe and the need for an EU-US Privacy Shield replacement (which was invalidated in July 2020 by the Schrems II legal decision). The EU-US Privacy Shield was used by companies to transport data between the US and EU. It was invalidated due to concerns over surveillance by US government and intelligence agencies. While very unlikely, Meta listed the possibility of pulling out of Europe due to these privacy issues – if forced to keep data in Europe, Meta is likely to make the necessary investments to reach compliance.

All of these pressures resulted in Facebook DAU (daily active users) declining in its most recent quarter (1.929 billion, down from 1.930 billion). Facebook MAUs (monthly active users) and DAP (daily active people) across all of its properties however, increased during the last quarter. These user results, coupled with challenges from IDFA (and privacy in general), concerns over Europe, and the controversies all contributed to the immediate 26% drop in Meta’s stock price (February 2nd to 3rd 2022) after announcing its quarterly results. An argument could be made that Facebook’s rebranding had little impact on the declines since Meta’s stock price increased for several days following the October 2021 announcement and remained relatively flat for the remainder of 2021—an indication some had hoped the rebranding would alleviate pressures surrounding the company from its controversies.   

Metaverse Push Not to Blame, but Hasn't Helped

IMPACT


Meta had previously announced it would spend over US$10 billion for its metaverse ambitions in 2021, which was assigned to its Reality Labs group, so the operating loss reported throughout the year in its Q4 2021 earnings announcement wasn’t a surprise. And while Meta did break out Reality Labs from its “Other” category, this segment of the business has from the start been a much smaller portion of the overall business (just 2.60% of total revenue in Q4 2021). So, neither of these values alone were cause for concern, but when taken into context of the existing problems and the likelihood these investments won’t pay off for years to come (possibly close to a decade) and it became clear Reality Labs and the metaverse won’t provide near term relief. Even after a strong showing by Oculus Quest 2 during the holidays, its Reality Labs division only added 0.05 percentage points to its quarterly share of total revenue from Q4 2020 (2.55% of revenue) to Q4 2021 (2.60% of revenue).

Further, its more immersive Horizon platform is still largely unmonetized and, in February, was announced to have reached 300,000 monthly users, which is reportedly ten times higher since it launched out of closed beta in December 2021. If we reference other social metaverses like South Korea’s Ifland (SK Telekom) and Zepeto (Naver), the 300,000 MAUs sound low, where Ifland and Zepeto have reached 1.1 million and 20 million MAUs respectively (albeit over a longer time horizon). Meta claimed there are already 10,000 worlds created, which sounds impressive, but this also means there are roughly thirty users per world if evenly distributed, which means many of these virtual spaces are relatively unpopulated. None of these, however, remotely compare to Meta overall, where Meta’s family of companies’ MAP hit 3.59 billion in Q2 2021 (Facebook MAUs were at 2.912 billion).

It is a long road ahead before these more deeply immersive experiences begin to offset potential damage stemming from Meta’s image and missteps or contribute to profitability. Meta, of course, knows this and is prepared to go the distance with the metaverse and immersive, but there are areas where the company could refocus its efforts to help accelerate the transition from traditional social media to one that looks more like the metaverse.

Move Aggressively on the 3D Front While Continuing to Invest in Immersive

RECOMMENDATIONS


Meta’s Horizon needs to move beyond Quest and become a 3D experience that supports other devices (namely PC and mobile). While this would mean creating virtual environments and user interfaces that support both Virtual Reality (VR) and non-VR experiences, it is the only way to reach a larger audience in the short term. Meta has already started work on standardizing avatars across the Oculus platform and these efforts should crossover into its more traditional social networking platforms as well. This process is somewhat complicated by Meta decoupling Facebook user accounts from Oculus (a Facebook account is no longer a requirement to use Oculus devices). If the connections and value of experience is high enough, however, more users will either use their Facebook accounts by default or link them to Oculus.     

Digital goods (i.e., clothing, accessories, and even objects/locations) should crossover into Meta’s other social networking properties, allowing users to populate their pages and photos with these digital goods – not unlike some of the Augmented Reality (AR) overlays common in today’s mobile applications. Brands could offer virtual items across Meta’s ecosystem of social networks which would create a localized metaverse. While this interoperability may initially be limited to Meta’s properties, this begins the process of shifting users’ expectations and behaviors in social networks. These actions may also help make their longstanding properties more appealing to the younger audiences. The accumulation of digital assets will also further incentivize users to look into more deeply immersive experiences like VR.

Meta will also need to open its ecosystem to other platforms to begin forming the interconnected foundation of the metaverse or future Internet. More deeply immersive experiences from AR and VR still need to evolve and develop in parallel, but these early metaverse experiences should not be confined to these devices alone. Even though some consumers will push back against these changes, so long as the overall user experience improves, Meta will be able to win over their user base; this will provide a stronger foundation to build upon than pushing a vision ten years away with devices that are still not ready for the larger mainstream audience.

 

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