Is this the end of Facebook’s social media dominance?

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Facebook has long been considered one of the major evolutionary companies that has transformed through the ages, and earned its rightful place as one of the leading tech platforms that has revolutionised social media. However, its recent performance has seen better days.

Cheryl Chan, our Senior Vice President for Capital Markets shares more in her radio interview with MoneyFM.

This radio interview was originally posted on Money FM.

Transcript

Money FM:
Money FM 89.3. Good morning and thanks for joining us on the breakfast huddle. Elliot Jacobs, Bharati Jagdish and Ryan Huang with you. Hey, so when was the last time you posted something on Facebook or liked something on Facebook?

Money FM:
I think it was just last week. I do use Facebook quite regularly.

Money FM:
Me too. You know, I understand from my younger friends that they never on Facebook, they're on various other platforms, and Facebook rarely comes up for them. I, in fact, liked something on Facebook just last night, and I posted something a couple of weeks ago, it’s starting to make me feel a bit old. But I think it is no secret, right, that their numbers have been dwindling.

Money FM:
To be fair, and I think this sentiment of it being old comes from how a certain age group of people use Facebook to spread fake news? You'll remember how it announced its daily users number user numbers had fallen for the first time in history.

There's this debate, as you mention. Is it really for the younger audience?

Money FM:
Or is it even a matter of age? Some of us just stay on Facebook because we started at that time on Facebook and our friends are just there. So, by default, so it may not be a function of age, just a function of a change in eras. Well, Meta platforms, which changed its name from Facebook last year as part of Mark Zuckerberg's attempt to shift the company's focus to immersive digital experience, did witness more than $500 billion in market value destroyed. So, it's not just dwindling user numbers. Dwindling user numbers are translating to a real cut and a real pain in terms of how much they're losing in terms of value. This is the worst one-day slump in the history of the stock market, by the way.

Money FM:
The crash had pushed Meta out of the top ten of largest global companies by market value. It was once the world's sixth largest company with a valuation in excess of $1 trillion, Meta has now fallen to the 11th most valuable company in the world, with a market cap of $565.4 billion, and they are behind Tencent holdings. To help us out with this and more is Cheryl Chan, Senior Vice President for capital markets at ADDX.

Cheryl, good morning. How are you?

Cheryl:
Very well. Thank you for having me.

Money FM:
Thanks a lot for helping us. Let's firstly set the stage here. Meta suffering the stock market's biggest one day wipe out ever earlier this month. What do you think this suggests about how people are reacting to Meta's social networking shift towards the virtual world or what they call the Metaverse? Is this coming out as a bit of a flaw?

Cheryl:
I think the thing to note is that the plunge in Meta's share price earlier this month was a key trigger, first, by a disappointing earnings report that they put out for the fourth quarter of last year, the fourth quarter of 2021. So, 3rd February, this is when they announced their earnings. And the overarching factor that we saw was that they had the first ever drop in user numbers. So, throughout the years, the numbers have had steady growth. But recently there's been a tapering off and even a drop of 1 million globally in numbers, as well as in North America, something close to 1 million. It raises a lot of questions about whether Facebook or Meta has hit a user growth ceiling. And then you also saw that profits were lower than expected.

The other thing that has come up quite a bit is that Apple changed privacy policy. So previously, Apple planned when users would sign in, they had options somewhere in the app to opt in/out on privacy. They might not be able to see it. But recently, Apple started requiring app developers to explicitly ask users for permission to track activity across the Internet. So very much an opt-in for users. This has had a large impact on Facebook net earnings from advertising revenues. This change could represent headwinds of something like 10 billion USD in 2022. So, you know, it's really a large impact. Facebook is saying that this is going to hurt small businesses. Small businesses have been relying on personal ads to grow. Apple is saying that this move is very important to protect users, to protect people's privacy, whichever side you're on. Really, this has had a large impact on Meta's earnings. And I think what investors are also realizing is that this is much in contrast to what the other tech giants have put out. They've had some very healthy growth in the last quarter. So, I'm talking about FANG stocks, Apple, Amazon, Netflix, Microsoft, Google. These have reported healthy growth compared to Meta.

Money FM:
You see a drop in the number of users, small competition changes to privacy policies. Some of the issues that Meta has been grappling with. Analysts feel they should have anticipated, they should have been prepared for this. They should have taken pre-emptive steps earlier on.
What's fundamentally wrong here? Are there things that the company needs to change perhaps, in terms of how it predicts the future and prepares for it?

Cheryl:
You’re right. They have an awareness of this change in dynamics through the years. In early 2012, there were signs that Facebook was losing momentum with younger users. And this problem has deepened in recent years. So, they are well aware and they're trying hard to change this. Some data points that we had was in a survey of teens in the US last year, whereas previously before 2012, 42% of teens said that Facebook was a favourite social media platform, the number just plunged to only 2% last year. And the figure is much behind the likes of Snapchat, which is at 35%, and TikTok, which is at 30%. And I guess the silver lining as Instagram is that 22% of teens who say that it is their favourite social. And yes, of course, Meta owns Instagram as well. In any case, we see that the competition is really fierce. If you're a teen, you want to be on the same social network that all your friends are on. Right? So it's a self-fulfilling kind of momentum that if your friends are not here on this platform or on this social media network, then you wouldn't be either. So, these things changed for Facebook or Meta since many years ago. And they realized this problem, which is why there's a bit of a retooling. There was a name change from Facebook to Meta clearly. And that sparked the beginning of their efforts to sort of bring back the youth of America and the rest of the world.

Money FM:
Hmm. You talk about a change in dynamics and consumption there. Instagram, as you have mentioned, is owned by Meta to introduce reels, and reels, is pretty much a TikTok copycat, if you don't mind me putting it that way. Algorithms have changed such that social media influencers have put more focus on reels. We see that Instagram have themselves have come up to say that you will see more reels come out instead of photographs. Obviously TikTok is the challenger here. What are you hearing in terms of how big Instagram could go with reels?

Cheryl:
I think reels are interesting. It is a short video feature, present in both Instagram and Facebook, very much like in TikTok. Meta started this in the last two years to rival TikTok. And, you know, earlier this week announced that reels would be expanded to 150 countries and have more editing and sharing features. So, I’m quite excited to see how that's going to look and how that compares to TikTok. Mark Zuckerberg is calling for patience during this period when they are pushing out reels, because for a start they think that revenues are going to be growing at a lower rate compared to how it was with the traditional news feeds and stories. But they also believe that the audience, the people who are using social media will be increasingly preferring this kind of short video format. They are really pushing ahead with this, despite it being a slow start for them and they are very determined to make this significant transition into reels so that it becomes a central part of the Facebook and Instagram experience. So, as I said, very excited to see how that's going to look. And I think just talking a bit about competition as well. You know, TikTok has also come under fire in recent months.

I remember that was an investigative report by The Wall Street Journal because TikTok was showing some inappropriate content to minors. So, it's not just Facebook or Meta that's facing a lot of these things from regulators. I think there is just a very large push to have social media platforms be safe for young people. I think we care a lot about our teens and young adults. And this is something very important that government agencies and leaders need to start acting on and making sure that social media is safe for everyone, young and old.

Money FM:
Facebook has been under scrutiny before for this for putting profits over user safety. At this point, you did talk about the privacy issues, the privacy policies that we will be seeing emerging and that continue to dog platforms such as these. What do you think Meta will do to overcome some of these challenges? I mean, don't forget, we are also looking to Google's implementation of its Privacy Sandbox initiative to Android.

Cheryl:
I would say that personalized advertising is the fundamental business model of a lot of social media platforms, not just Meta. They are not the only ones that are affected by this. And this is really the reason why social media platforms were able to disrupt the traditional media industry in the first place. However, with this privacy policy from Apple, from Android, we understand, a pushback against hyper personalization. So, I think the way in which Meta and the other social media platforms can fight back is, instead of this hyper personalization, they can find a sort of middle ground, where instead of targeting individuals, there is a consensus that these social media platforms, they can instead target advertising based on groups and archetypes. So, users are not categorized based on what they input into their phones, but on behavioural demographic traits. So, each category of users gets exposed to advertising that is relevant for that group and they don't have to make it as a mentioned, hyper personalized. So, a lot of these platforms, Meta being one big one, is working very hard to be prepared for this change and a belief that they can adapt their business models quite quickly to suit this.

Money FM:
Just going to put a two in one question here as we try and wrap up this segment. Facebook or Meta has had a history of purchasing companies. They purchased the Oculus VR business back in 2014. Now they're getting into Meta. They purchased Instagram in 2012. Now they're trying to rival TikTok. A, are you expecting Facebook or Meta to continue big purchases like that? And B, what is your current growth outlook for Meta?

Cheryl:
I think that the pivot into the Metaverse is definitely a very significant move for Meta. And to your first question, I believe that they will continue to make big purchases, because this has been something that Facebook has been doing since their early beginnings. In terms of growth outlook, I think that Meta has had a very good record of rebounding from share price dips. And investors have really seen dips in the past as being very good opportunities, chances to buy into the shares as I think a lot were very bullish about long term growth prospects. Now we see this time to be a bit different. There was no big rebound since early February. And I think overnight the stock went down even more to below 200, which I think it was a bit of a key number for investors as well. So, this suggests that investor optimism has been very much dampened, although I would also say that the falling share price is also due to the larger backdrop. We all know about the geopolitical tensions, the possible war that might break out between Russia and Ukraine. We know about inflation, about central banks raising interest rates, expectations that they would raise multiple times this year. So, 2022 is not really a great time or great year for public stocks anyway. That has also affected the way that Meta has performed. But I would say that what's noteworthy is most analysts covering Meta still saying that it should be a buy. So, they're still recommending a buy based on the discount that the stock is now on offer at.

So don't write off Meta completely. The company still has considerable resources in the past, have done a lot of purchases and I think that would continue to happen. They understand the enormity of the problem around the teams and users moving away from them. They're not just going to sit by and allow large chunks of their market share to slip away. I think they will be coming back with a strong response.

Money FM:
All right. Thank you very much for that analysis, Cheryl. Cheryl Chan, Senior VP for Capital Markets at ADDX. Thanks for joining us, Cheryl. You stay safe and take care.

Cheryl:
Thank you.