Earnings season has always been pretty nerve-wracking for investors. This is the time where companies report their performances over the last quarter. Also the moment you discover if your investments are still on the right track.
For Meta’s shareholders however, it seems that this report wasn’t what the market wanted to hear. Despite a relatively benign performance, the company also stated operating challenges such as slowing user growth, Apple’s OS changes, and a more competitive climate.
Meta’s stock plunge now represents the biggest single-day slide in market value for a U.S. company. A frightening aspect for Big-tech, and especially in times like this.
There are lessons to be learnt here, especially for tech investors. We run through 4 which we have picked up from this recent crash.
When looking at Meta’s recent report, you wouldn’t be blamed for failing to identify any major faults. In fact, most performance metrics such as overall revenue, and user count are doing reasonably well.
Despite this however, investors and the media latched onto statements by the company on upcoming obstacles in the way of growth. Such negativity, coupled with an unenthusiastic macro environment, affected it’s outlook, and share price.
The takeaway is this; a company’s valuations are affected by more than just it’s performance. One way or another, factors such as future outlook and obstacles are also baked into it’s share price.
As the saying goes, “Markets are always forward looking”.
Wealth Attracts Attention
Meta’s operating margins for the past few years represent the epitome of a software company. They also embody many of the operational strengths which make such enterprises so attractive.
These include low overheads, the ability to scale, and little-to-no reliance on physical products. Combined, these aspects make Meta’s market share extremely attractive and profitable.
Such wealth would definitely attract competitors, especially those in similar industries, or who possess the ability to encroach upon Meta’s business space. Over time, they will be able to catch up to Meta and eat into it’s margins.
This approach applies to many vastly profitable companies out there. A great business model would definitely invite competition as others know there’s money to be made in this space.
Facebook, Meta’s predecessor, has been plagued by anti-trust lawsuits since 2018. Consumers clearly don’t take kindly to their private information being used for marketing and other more egregious actions.
These hurdles have stymied Meta’s growth for years, and don’t seem to be going away anytime soon. Acquisitions, another way for Meta to grow it’s business empire, has also been under scrutiny.
There are two lessons here. One, the world expects anti-monopolistic practices as these are proven to be more beneficial for the public. As a result many countries including Singapore, have regulations preventing market dominance.
The second takeaway applies especially to big, blue-chip companies in all industries. Regulations will catch up to you when you start getting too rich and powerful. We’ve seen this happen in China big-tech, and also in the energy industry as well.
Big Changes Are Risky
Meta’s CEO plans to prepare the organization for the next bound of social networking by investing in the Metaverse, a virtual world where people can experience things through virtual or augmented reality.
The problem however, is that the Metaverse is still in it’s infant stages, with many of it’s supporting technologies still undeveloped or not adopted widely. Any opportunities created by the Metaverse will likely only manifest much further down.
Investors know that ventures like these will surely eat into Meta’s present and future earnings, and represent a huge opportunity cost for the social giant. Future returns are also reliant on Meta’s execution being on point.
We can see that critical business transitions like these come at a cost to the company’s share price, as they cast the shadow of uncertainty on the business’s future. And the market doesn’t like uncertainty.
While Meta’s case might seem like a one-off event, many of the underlying causes are in fact present in other listed organizations. Investors should pay attention to the signs and symptoms in order to avoid substantial losses.
Of course, in the grander scheme of things, it’s entirely possible that the Metaverse plays out beautifully to overwhelming demand, and Meta shareholders get back their money’s worth.
Something that only time will tell.