Meta is Facing Turbulence
For owners of Meta Platforms stock, parent company of Facebook, they experienced a massive drawdown after the company released its Q4 earnings last week. After the dust had settled, share prices that closed Wednesday at $323 opened at approximately $245 on Thursday. For those who didn’t follow along to the earnings call or haven’t read into the reasoning behind the selloffs, below consensus earnings along with additional stock repurchases led the charge.
Meta CEO, Mark Zuckerberg, certainly could not have been pleased with the performance of his tech giant over the past quarter. As mentioned above, a significant reason for this drawdown was a decline in profit. The firm reported having lost approximately 1 million daily users on a global basis (Fontana). To most that may not seem like a big deal, but it is important to note how Meta Platforms (or Facebook) generates profit. The majority of Meta’s revenue is generated through selling advertisement space on its various platforms such as Facebook, Instagram, Messenger, and WhatsApp. For this model to be successful, its various platforms are reliant on foot traffic. As Zuckerberg alluded to in the earnings call last week, increased competition such as TokTok as well as a newfound focus on Reels, or short-lasting videos people are accustomed to watching on TikTok are a big reason for turbulence of its share price.
Another contributing factor to Meta Platform’s share price decline is the amount of stock buybacks the company is making and has made over the past year. Many investors may not understand what stock buybacks (or repurchases) are and how they could affect the share price of a publicly traded company. In summary, when a company repurchases its outstanding shares it tightens the supply of remaining shares, which economic theory tells us should raise the price of an asset. Companies who don’t pay dividends will occasionally use this method to “repay” its shareholders indirectly. Part of the theory behind this strategy is to help make share prices look more attractive on the secondary market. However, in order to fund a stock repurchase, a company will use a portion of cash, cash flow, or take on debt. While this strategy may be beneficial for a firm with growing profits, it can also compound the negative effects of declining profit, as seen by Meta Platforms in Q4.
Andrew Barry wrote in his Barron’s article, “Meta repurchased a record $44.8 billion of stock in 2021 and the vast bulk of that—some $33 billion—occurred in the second half of the year” (Barry). Yikes. Interestingly, Zuckerberg and other C-Suite executives didn’t address these buybacks in detail on its Wednesday earnings call. Investors should continue to pay close attention to the performance of Meta Platforms in the quarters to come as increased competition drives down profit margins and how the firm's revenue drivers evolve to meet consumer trends and preferences.
Barry, Andrew. “Facebook Parent Meta Ramped up Stock Buybacks at a Bad Time.” Barron's, Barrons, 3 Feb. 2022, https://www.barrons.com/articles/facebook-meta-stock-buybacks-51643841821?mod=hp_LEAD_1_B_1.
Fontana, Francesca. “Meta, Exxon, Snap: Stocks That Defined the Week.” The Wall Street Journal, Dow Jones & Company, 4 Feb. 2022, https://www.wsj.com/articles/meta-exxon-snap-stocks-that-defined-the-week-11644016868?mod=Searchresults_pos4&page=1.