US tech stocks are trading lower in premarket price action today after investors gave a thumbs down to the earnings of Alphabet and Microsoft. Markets next look forward to Meta Platforms’ Q3 earnings later today.
Wall Street analysts expect Meta Platforms to report revenues of $27.4 billion in the third quarter of 2022, a YoY fall of 5.5%. Notably, since the start of the earnings season, analysts have further downwardly revised the company’s revenue projections.
To be sure, even Meta Platforms predicted that its revenues would fall YoY in the third quarter but did not quantify. The company posted a YoY fall in its Q2 2022 revenues as well.
While the entire FAANG space is witnessing a growth slowdown, things have been quite bad for Meta Platforms. The revenues of other Big Tech companies are still growing, albeit at a much slower pace.
For instance, Microsoft reported revenues of $50.1 billion in the September quarter, a YoY rise of 11%. The growth was the slowest in five years. Even Alphabet’s revenue growth was the slowest since 2013 if we exclude one quarter in 2020 where the Google parent reported a YoY fall in revenues.
Amazon’s revenue growth is also hovering near two-decade lows. However, Meta Platforms’ revenues are shrinking and analysts don’t expect its sales to rise in the fourth quarter also. No wonder, Meta Platforms is the worst-performing FAANG stock of the year and has lost over half a trillion in market cap this year.
Meta Platforms Faces Structural Headwinds
Meta Platforms faces some structural headwinds. There is a global clamor over data privacy issues and targeted ads which is hurting social media companies. Apple’s iPhone privacy rules were also a dampener for Meta Platforms and the company estimates that it would lose up to $10 billion in revenues this year due to the new privacy rules.
Facebook has reached peak penetration in most markets and the app’s popularity has fallen among teens. A recent survey conducted by Piper Sandler has shown that TikTok’s popularity among teens has risen and it is the most popular social media platform.
While most analysts have a buy rating on Meta Platforms stock, some have turned apprehensive given the uncertainty surrounding its metaverse business and the continued slowdown in digital ad spending.
Higher Competition from TikTok is Hurting Social Media Companies
It also faces steep competition from TikTok. Despite promoting “Reels” Meta Platforms hasn’t been able to challenge TikTok’s dominance in the short video market. In a recent interview, Meta Platforms’ CEO Mark Zuckerburg minced no words and admitted that TikTok has been a “very effective competitor.”
TikTok is the most valuable private startup company. It was looking to IPO in the US in 2020 after then-President Donald Trump threatened to ban the app in the country.
However, given the current volatile IPO market, ByteDance might not look at an IPO anytime soon. The US IPO market has especially been dead this year. There are however ways through which one can invest in pre-IPOs.
Metaverse is a Drag on Meta Platforms’ Earnings
Last year, Facebook rebranded itself as Meta Platforms to reflect its business strategy. The company is investing billions of dollars into building the metaverse and sees it as a key growth driver. Companies like Nvidia also see metaverse as a key growth driver. We have a list of companies that are a play on metaverse.
However, analysts as well as some Meta Platforms’ stockholders are concerned about the massive spending towards building the metaverse. Altimeter Capital Chair Brad Gerstner, whose firm is a Meta Platforms shareholder, has written an open letter to the company where he made three suggestions.
Altimeter Capital Wrote an Open Letter to Mark Zuckerburg
Firstly, he said that the company should lower its headcount by 20%. Secondly, he said that Meta Platforms should lower its annual capex from $30 billion to $25 billion. Finally, he said that the company should not spend more than $5 billion annually on building the metaverse. Reportedly, the initial performance of Meta’s metaverse business hasn’t been satisfactory.
The WSJ reported that Horizon Worlds, which is Meta Platforms’ flagship metaverse product only has 200,000 users so far. Reportedly, the company was previously targeting 500,000 users by the end of the year but has now scaled back the target to 280,000 users only.
During Meta Platforms’ earnings release, Zuckerburg might address the issues that Gerstner raised in his letter. Among others, he would need to justify the massive metaverse investments in a rising rate environment which has prompted many companies to cut down on their capex.
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