With the end of the year approaching there has been a renewed wave of angst amongst investors as they ponder the 2022 outlook for social media leviathan Meta Platforms – or Facebook as it was known until recently.

There are four reasons why investors are increasingly concerned. First the rise of social media network TikTok has the potential to disrupt Meta’s business model. Second, Apple’s recent decision to make tracking of its users’ online activities by third parties an opt-in process has improved its own competitiveness at the expense of Meta.

Third, the regulatory environment is likely to make large-scale mergers and acquisitions increasingly problematic.

There is also widespread scepticism regarding CEO Mark Zuckerberg’s vision of the metaverse. According to Neil Campling, technology analyst at Mirabaud Securities, the new venture will lose an estimated $7 billion this year, and these losses are expected to increase next year.

META SHARES DEPRESSED

Such concerns explain why Meta shares are trading in line with the average price to earnings for the S&P 500 at less than 30 times earnings, versus a historical five-year premium of 34%. There are several reasons to believe the business can deal with these challenges.

Investment bank UBS maintains that current market advertising estimates for the group are ‘too low in 2022’. Its 2022 base case and upside earnings per share estimates are 5% and 21% ahead of consensus estimates. This more constructive outlook is predicated on two new initiatives.

First, Reels on the Instagram platform enables individuals to earn money by creating fun and inspiring short videos consisting of music, augmented reality effects, and text overlays. According to UBS estimates this could generate $50 billion in advertising revenue over the medium term.

Second, by creating an online storefront within Meta, potential customers can browse, explore and purchase items directly on Facebook and Instagram. UBS suggests this initiative could drive $2.2 billion to $13.6 billion in total revenue or 1.4% to 8.4% of its 2023 advertising revenue estimates.

TIKTOK A POTENTIAL DISRUPTOR

TikTok user growth surged during the pandemic, which is indicative of its velocity of content creation and engagement levels. It only took TikTok 45 months to scale from 50 million to 1 billion monthly average users. This compares with Instagram’s 74 months (achieved back in 2018).

In September TikTok revealed a new programme called TikTok Shopping. The offering enables advertisers to market their products and sell them directly within the app, in either the videos or on profile pages. This has the potential to significantly enhance group revenue.

However despite the remarkable success achieved by TikTok in a short period, the threat it poses to Meta may have been overestimated.

Advertising budgets still remain very small on the platform and its advertising technology remains far behind the likes of Meta and Snap. TikTok’s self-serve advertising platform remains in its infancy and the majority of budgets are emanating from negotiated deals with large brands, as well as spending through influencers.

Meta has invested more in its self-service advertising platform than any competitor, with $21 billion allocated in this year alone. This compares with Twitter, its nearest competitor, which has an equivalent expenditure of $1 billion.

THE IMPACT OF APPLE’S CHANGE TO USER TRACKING

The changes implemented by Apple regarding the tracking of online activities by third parties has significantly impaired Meta’s access to users within Apple’s iOS environment.

Ben Rogoff fund manager of the Polar Capital Technology Trust (PCT) highlights the impact in his latest fund update, saying: ‘Management also underestimated the headwind from Apple’s iOS14 changes and advertising revenue only grew +32% (year-on-year at constant currency) in the quarter’.

On the recent third quarter earnings call Meta revealed that the impact from the changes is two-fold. ‘One is that the accuracy of our ads targeting decreased which increased the cost of driving outcomes for our advertisers and the other is that measuring those outcomes becomes more difficult.’

Nonetheless, the extent to which this is still a relevant issue is open to question. UBS suggests that those advertisers which are planning to scale back their spending with Meta have already done so.

REGULATORY THREAT

Regulation has the potential to hurt Meta in two respects. First, in the future it is unlikely to be able to pursue significant mergers and acquisitions.

This is important because Instagram, WhatsApp, virtual reality specialist Oculus and online advertising outfit Atlas were strategically critical acquisitions that constitute a significant proportion of Meta’s identity today. In this context it is relevant to note that Meta has failed to internally develop a unique product since it launched its news feed in 2006.

Second, there is a risk that costs escalate at a faster rate than the market currently anticipates. Leaked internal records indicate it is only catching a single digit share of the content it is screening, and only 2% of content moderation spend is outside the US. This suggests there may need to be further significant investment to ensure its platforms are being policed properly for harmful, misleading or offensive material.

Meta faces two pieces of regulatory legislation. The first is KIDS (Kids Internet Design and Safety Act). In its current form the bill would protect users aged 16 and under from features including push alerts and like counts, that encourage greater app usage. The bill could potentially have a negative impact on the level of engagement Meta can achieve with the younger demographic cohorts.

The second, Section 230 reform, requires platforms to remove court-determined illegal content and activity within four days. In addition it requires platforms to have a direct complaint system and report biannually statistics on content that has been removed.

The more profound concern that the company may be broken up thanks to more aggressive antitrust enforcement in the US appears misplaced. Legal experts maintain that a dismantling of the group would be highly unusual given that Instagram and WhatsApp have both been through a Federal Trade Commission review.

METAVERSE AN UNPROVEN CONCEPT

Meta is attempting to establish a lead in what Mark Zuckerberg believes will be the next evolution of the internet, the so-called metaverse. However there are multiple obstacles that may stymie his vision.

Meta faces competition from other extremely well resourced technology companies. Microsoft is investing in its own version of the metaverse, with the aim of improving remote meetings.

Roblox has already launched its own version of the metaverse. This allows gamers to create and host their own game worlds.

And Nvidia, which designs graphic processing units for the gaming and professional markets, is investing in Omniverse. This is an open platform built for virtual collaboration and real time physically accurate simulations.

Meta’s disappointing experience with Oculus (the virtual headset business it acquired in 2014) is indicative of another obstacle it faces. Sales were lacklustre due to the lukewarm adoption of virtual reality by non-gamers.

This resulted in the initial advertising partner for the Oculus headset stepping away, following complaints from users who objected to advertising that detracted from their gaming experience.

THE LEVERS META CAN PULL

Set against these concerns there are some levers Meta can still pull. 

Facebook has hopes to leverage its position as the most popular app in the world to appeal to creators.

With nearly 3 billion active users, the platform boasts an unprecedented volume of traffic that will certainly appeal to creators. Next year the platform is offering $1 billion in payouts to creators for engaging content.

Launched on Instagram in August 2020 Reels, much like TikTok, lets users create short-form videos with overlaid music and filters.

Both Facebook and Instagram already support a degree of e-commerce. Facebook has Marketplace, while Instagram allows users to buy products featured in posts and advertisements. However the company’s new initiative enables business to create a fully-formed Facebook Shop.

Businesses will be able to create a shop for free. They simply upload their catalogue, choose the products they want to feature, then customise. Visitors can then browse, save and order products, all without leaving the Facebook app. It’s convenient and convenience fosters sales.

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