It’s a day that will live in infamy. For now.
On Thursday, Feb. 3, Meta Platforms (the company formerly known as Facebook) announced its earnings and tanked some 26.4 percent in the blink of an eye. In that same blink, some $232 billion of market capitalization was wiped off the face of the company.
That’s a pretty hefty ding in the price. (And apparently a record for a single stock. But most companies don’t have $232 billion in market cap to give up.)
Unfortunately Meta’s announcement proved one thing: that mega-cap big tech companies hold outsized sway over the market as a whole.
They took the S&P 500 down 112 points, or 2.5 percent, as well.
It’s a shocking reality. Prior to the slide, the market capitalization of the S&P 500 Index was roughly $40 trillion. And the top eight companies that make up the index comprise roughly one-third of that.
3 Challenges Facing Facebook
There are a couple things investors need to understand where Meta’s blowout goes.First, when, as a growth company, you go from a fast-growing company to a less-than-fast-growing company, you’re going to take a hit. Despite its mega-cap status, Meta is still considered a growth stock.
But if you miss a revenue estimate or worse, lower your forward guidance, the hammer is coming down.
Meta cut its 2022 first-quarter revenue projection to the range of $27 billion to $29 billion, compared to Wall Street’s expectations of $30.15 billion.
Boom.
The second thing you need to consider—and my wife hates it when I say this because she’s a big Facebook user—Facebook is becoming an old persons’ platform.
When it first launched it had a virtual monopoly on the 18-to-20-something demographic. Today many younger social media users are favoring other platforms like TikTok and Snapchat. It’s not at critical mass yet, but it is a trend. And losing market share is not good for a company’s growth.
The third piece in this puzzle is Apple, and Sheryl Sandburg was all too willing to place blame there. And she was probably right.
A year ago, Apple implemented an “Ask to Track” feature in its iOS 15. All the apps that ran on its platform had to ask permission to track their users across other apps.
Turns out people value their privacy. Roughly 84 percent of Apple users started saying “No!”
This, in turn, took away Meta’s (and other platforms’) ability to serve targeted ads to their users. This was a massive hit to companies who rely on ad income. Estimates are that it cost Meta some $10 billion over the last two years.
Down but Not Out… Yet
So what does this mean for Meta?It means it’s in the penalty box going forward—but not out of the game.
Right now too many funds own FB to do any real damage to its standing in the market. BUT, that said, the next two quarters will be critical for its future. It’ll need to show a rebound in growth potential—and that it has a plan for dealing with its current growth issues.
Also on the table will be its investment in the metaverse. The company has spent approximately $10 billion in the next evolutionary step in the internet known as the metaverse. It’s going to need to show some kind of ROI on that investment.
If they can’t do that in the coming months, it’s going to be some rough sledding for Zuck and company going forward. And the market could be in line for some version of Tech Wreck 2.0.
But all is not lost for investors.
A lot of smaller growth stocks (and pandemic darlings) like Zoom (ZM) and Teladoc Health (TDOC) have already been getting revalued for an entire year. Some are approaching valuations that are reasonable—maybe even cheap.
Cathie Wood’s ARK funds have been living in the woodshed for sometime as well. They may be long overdue for a rebound.
This may actually be a time when you want to buy the dip instead of strength where growth stocks are concerned.
But be warned, part of the fate of all these companies will still hang in the balance where the mega-caps are concerned. More bad news from a company like Meta will keep everything under pressure.
Solid growth companies will survive—but not without the threat of some pain.
