Facebook has changed the world. Why the stock stopped working.

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Social media is arguably the most influential innovation of the 21st century. If an event in 2022 doesn’t make it to a social feed, it never really happened, like the tree falling in a forest with no one around to hear it.

But 20 years after Friendster kick-started the industry, something else has become clear about social media: It’s not a particularly good thing. Based on traditional accounting statistics,

Snapchat

parent company Snap (ticker: SNAP) has never made an annual profit.

Twitter

(TWTR) has only two profitable years to show that it’s nearly ten years as a publicly traded company.

Pinterest

(PINS) finally made money in 2021, but Wall Street predicts a return to losses this year.

For much of its existence, the industry’s struggles have been masked by:

facebook
‘s

dominance. Facebook.com became a human operating system. It was a brilliant idea that was executed perfectly. It couldn’t help but make money. But in hindsight, Facebook wasn’t all that different from a fad diet. It made everyone feel good; then we felt guilty. And finally it stopped working most of the time.

Last week, Facebook’s smaller rival Snap said it was cutting 20% ​​of its workforce, or about 1,200 jobs, while canceling non-core projects like the flying selfie camera known as the Pixy.

“We now have to face the consequences of our lower 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 set in a Delaware courtroom, where it will try to force Elon Musk to complete his purchase of the company, even as he regularly belittles the company himself.

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Most of Wall Street has been trampled underfoot by the social media struggle. But not everyone. In 2017, Brian Wieser of Pivotal Research lowered Facebook’s stock, making him only one of two analysts with a sell recommendation for the stock.

“Every year that goes by, digital advertising gets closer to a point where the market is saturated,” Wieser wrote in his downgrade note in July 2017.

At the time, Facebook was trading at $172. The stock — rebranded as Meta Platforms (META) — closed at $160 Friday, meaning investors who bought and held Facebook stock five years ago have lost money. In that same period you could have owned better

IBM

(IBM), which itself was already dead money, but at least paid out dividends.

Procter & Gamble

(PG), Ford Motor (F) and McDonald’s (MCD) are among the stocks that have easily surpassed Facebook’s five-year price increase.

I spent the last week talking with Wieser about what everyone has done wrong and what lessons we can learn from the miscalculations.

“What I think a lot of Wall Street and, frankly, most companies themselves have missed is that they’re essentially advertising companies,” Wieser says.

Social media companies became just another example of start-ups claiming that technology could change the very foundation of business. Think

We work

in real estate,

Teladoc Health

(TDOC) in medicine and Peloton Interactive (PTON) in fitness. As we’ve learned over the past year, market reality is still ultimately trumping technology.

Wieser says his lead over Facebook was his experience at an advertising agency before he got to work on Wall Street. He never lost sight of the fact that over time ad revenue grows roughly in line with gross domestic product adjusted for inflation. That means growth rates of almost 5%. “Investors’ expectations for the sustainability of growth rates of 20% or 30% were unrealistic and unsustainable,” he says.

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Meanwhile, social media companies tended to buy in their own marketing. In Silicon Valley, Wieser says, “They don’t necessarily care about advertising or want to understand it. They manage to advertise in spite of themselves.”

When Snap went public in 2017, the company referred to itself as a “camera company” in the first line of its prospectus. That description still tops the company’s annual report, although the same document states, “We generate virtually all of our revenue from advertising.”

Wieser left Wall Street in 2019 and is now Global President of Business Intelligence for

WPP
‘s

(WPP) advertising buyer GroupM. As Meta stocks continue to fall, analysts have clung to the idea that it remains a disruptive force. Forty of the 56 analysts covering Meta still rate the stock on Buy or its equivalent, according to FactSet. There are only two Sells left. The average price target is $221, more than 35% above the current level.

Rosenblatt Securities analyst Barton Crockett has one of 14 Hold ratings, but he is only one of three analysts with a price target below Meta’s current price. His target of $156 implies a 2.5% disadvantage.

“For much of social media, we are going through a painful but inevitable and ultimately healthy process of transformation from juggernaut to business,” Crockett says. “And what we’re seeing are different stages of denial and finally acceptance of the inevitability.”

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Snap’s announcement of cost-cutting last week — and the cancellation of its Pixy flying camera — was the “juggernaut to business moment,” Crockett says. “They focus on what’s important, where they have a strong sense of getting something back.”

Meta, on the other hand, still thinks like a juggernaut who can conquer economics through scale. Today, Facebook reaches about three billion people, but user growth has stalled.

Crockett says the company’s metaverse ambitions — at the expense of advertising reality — “symbolize the refusal to accept and live with who you are, what a business is.”

Social media followers could point to TikTok as the next new thing. But TikTok is another ad company that is unlikely to bend the long-term ad spend curve anymore.

There’s already evidence that TikTok’s emphasis on short-term videos, while addictive to users, may not translate 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 US, versus 1.4 cents for Facebook and half a cent for YouTube.

“Nobody likes change, but on the internet it’s evolve or die,” the Bernstein analysts write. “But what if something horrific happens that ruins the advertiser’s economy, creative arts, and consumer attention… all desperate for that next 15-second hit?”

Bernstein says “stay tuned” for the answer, but I think we already know what happens next.

Write to Alex Eule at [email protected]