Both Facebook and Snap Stock are cheap. Why stocks can still struggle.
Social media is perhaps the most influential innovation of the 21st century. In 2022, if an event doesn’t happen on a social feed, it never really happened, like the falling tree in a forest with no one to hear it.
But 20 years after Friendster launched the industry, something else has become clear about social media: it’s not a particularly good business. Based on traditional accounting metrics,
parent company Snap (ticker: SNAP) has never made a full year profit.
(TWTR) has just two profitable years to show for its near-decade as a public company.
(PINS) finally made money in 2021, but Wall Street forecasts a return to losses this year.
For much of its existence, the industry’s struggles were masked by
dominance. Facebook.com has become a human operating system. It was a brilliant idea that was executed perfectly. It could only make money. But in retrospect, Facebook wasn’t all that different from a fad diet. It did everyone good; then it made us feel guilty. And finally, it practically stopped working.
Last week, Facebook’s smaller rival Snap said it was cutting 20% of its workforce, or around 1,200 jobs, while canceling non-essential projects such as its flying selfie camera known as Pixy. .
“We must now deal with the consequences of our weak revenue growth and adapt to the market environment,” Snap co-founder and CEO Evan Spiegel wrote in a letter to employees.
Meanwhile, Twitter’s future is tied in a Delaware courtroomwhere he will attempt to force Elon Musk to complete his takeover of the company, even as he regularly disparages the company itself.
Most of Wall Street was caught off guard by the social media struggles. But not everyone. In 2017, Brian Wieser of Pivotal Research downgraded Facebook shares, making him one of two analysts with a sell rating on the stock.
“With each passing year, digital advertising moves closer to a point where the market is saturated,” Wieser wrote in his demotion note in July 2017.
At the time, Facebook was trading at $172. The stock – under its new name Meta Platforms (META) – closed at $160 on Friday, meaning investors who bought Facebook stock five years ago and held on to it lost money. During this same period, you would have been better off owning
(IBM), which itself was dead money but at least paid a dividend.
Procter & Gamble
(PG), Ford Motor (F) and McDonald’s (MCD) are among stocks that have easily outpaced Facebook’s five-year price appreciation.
I spoke to Wieser last week about what everyone got wrong and what lessons we can learn from miscalculations.
“What I think a lot about Wall Street and, frankly, most companies themselves is that they are fundamentally ad companies,” Wieser says.
Social media companies have become just one more example of start-ups claiming that technology can change the fundamentals of business. Think
In the real estate,
(TDOC) in medicine and Peloton Interactive (PTON) in fitness. As we’ve learned over the past year, market realities always win out over technology.
Wieser says his advantage on Facebook was his experience at an advertising agency before going to work on Wall Street. He never lost sight of the fact that advertising revenue over time grows at roughly the same rate as inflation-adjusted gross domestic product. This means growth rates close to 5%. “Investor expectations of the sustainability of 20% or 30% growth rates were unrealistic and unsustainable,” he says.
Meanwhile, social media companies tended to buy their own marketing. Across Silicon Valley, says Wieser, “they don’t necessarily care or care about understanding advertising. They succeed in spite of themselves in advertising.
When Snap went public in 2017, the company called itself a “camera company” in the first line of its prospectus. This description still tops the company’s annual report, even though the same document states, “We generate nearly all of our revenue from advertising.
Wieser left Wall Street in 2019 and is now Global President of Business Intelligence for
(WPP) GroupM ad buyer. As Meta stock continues to fall, analysts have clung to the idea that it remains a disruptive force. Forty of 56 analysts covering Meta still rate the stock at Buy or its equivalent, according to FactSet. There are still only two sales. The average price target is $221, more than 35% above current levels.
Rosenblatt Securities analyst Barton Crockett has one of 14 Hold ratings, but he is only one of three analysts who have a price target below the current Meta price. His target of $156 implies a decline of 2.5%.
“For much of social media, we are going through a painful but inevitable, and ultimately healthy process of transformation from juggernaut to business,” says Crockett. “And what we see are different stages of denial, and ultimately acceptance, of the inevitability.”
Snap’s cost-cutting announcement last week and the cancellation of his Pixy flying camera— was his “business juggernaut of the moment,” Crockett says. “They focus on what’s important, where they can feel strongly that they’re getting a return.”
Meta, on the other hand, still thinks like a behemoth that can overcome economics through scale. Today, Facebook reaches around three billion people, but user growth has stalled.
Crockett says the company’s metaverse ambitions — at the expense of its advertising reality — “is emblematic of refusing to accept and live with who you are, who a company is.”
Social media followers might point to TikTok as the next big thing. But TikTok is another ad company that is more likely to bend the long-term ad spend curve.
There are already indications that TikTok’s focus on short-form videos, while addictive for users, might not convert very well into advertising dollars. In a recent report titled “Has TikTok Ruined the Internet? Bernstein analysts note that TikTok generates two-tenths of a cent for every user minute spent in the United States, compared to 1.4 cents for Facebook and half a cent for YouTube.
“No one likes change, but on the internet it’s evolve or die,” Bernstein analysts write. “But what if something more derogatory happens that ruins the economy of advertisers, the artistry of creators, and the attention of consumers along the way…all desperate for this next 15 second shot?
Bernstein says “stay tuned” for the answer, but I think we already know what happens next.
Write to Alex Eule at [email protected]