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By Jeran Wittenstein
(Bloomberg Businessweek) — When a big stock dives, as Meta Platforms Inc. did on Oct. 27, dropping almost 25%, investors are often urged to take the long view of its performance. In this case, it hardly helps. If you bought Meta five years ago—back when the company was still known as Facebook—you’d be down about 49%, in a period when the S&P 500 climbed 45%. Meta has not only erased its gains from the pandemic, which turned social media into an essential technology, but also fallen back to where it was in 2015.
Meta isn’t just another stock—it was a constituent of the FAANG group, investors’ shorthand for a set of seemingly invincible technology companies. Along with the former Facebook, there were Amazon.com, Apple, Netflix and Google parent Alphabet. Despite their high valuations, many investors regarded these stocks as safe investments, because together they captured where so much of the economy’s growth seemed to be—from retailing to entertainment to smartphones—while also commanding strong balance sheets and huge scale to fend off rivals. Today, even though the five stocks still make up over 13% of the market value of the S&P 500, the FAANG narrative seems like it’s over for good.
It’s partly a story specific to Meta and increasing skepticism about Chief Executive Officer Mark Zuckerberg’s focus on a still-hazy venture called the metaverse. But it’s also a story about how investors have changed their thinking about companies’ promises of long-run growth versus the profits they can deliver in the next few quarters or years. Although their declines in the past 12 months aren’t as deep as Meta’s 72% drop, most of the other FAANGs have had a rough time, with losses of 40% to 60%. Only Apple Inc. has treaded water. “Investors are having a crisis of confidence in growth,” says Gene Munster, co-founder of Loup Ventures, a technology investment firm. Big Tech investors are embracing the idea that a slowdown “could go on for years.”
Investors’ worries about Meta had been building for months. In February the company suffered the worst single-day valuation drop in US stock market history, erasing more than $251 billion, after reporting a drop in Facebook’s daily active users. The catalyst for October’s tumble was another grim earnings report that showed revenue shrinking. But on top of that, Meta pledged to spend even more on investments in technology hardware to facilitate its shift toward the metaverse, a fledgling immersive digital world.
In remarks to analysts, Zuckerberg said the company was doing leading work on the metaverse and that it’s “often going to take a few versions of each product before they become mainstream.” There are still long-term Meta optimists. Munster says if there’s a next step for social media beyond mobile phones, just a few companies will be able to dominate “and they’re one of them.”
But the message from shareholders so far has been clear: They don’t want to gamble on a next big thing that could take years to pay off, and they want better performance from the core social media brands. That’s a common-sense approach, but one that hasn’t always been applied to Big Tech, where winners often pivot from one business to the next as growth seems to top out. Netflix was DVDs in the mail, then streaming, then a Hollywood player to rival Walt Disney Co. Amazon was books, then a general retail colossus plus cloud computing plus microphones in your house. Facebook was a homepage for college students, then a news feed, and then morphed into mobile media with messaging and photos and video as it became Meta.
“Facebook proved itself to be a successful company that started with nothing and gained everything,” says Marshall Front, chief investment officer at Front Barnett Associates. “The question is, can they do this again? There is a lot of skepticism out there.” The new wariness may stem partly from how speculative the metaverse is. Meanwhile, the core existing business is slowing down. Meta averaged annual revenue growth of about 42% from 2013 through 2021. This year, the company’s sales are projected to shrink by 1%, according to the average of analyst estimates compiled by Bloomberg. There’s fierce competition from TikTok and worries about advertisers cutting spending further in a possible recession, which have also weighed on other social media companies. (Snap Inc. is down 79% this year.)
But investors’ loss of faith has been magnified by a jump in interest rates as the Federal Reserve attempts to rein in high inflation. Rising rates can have a particularly strong effect on technology companies, because their valuations are based on the promise of bigger profits further into the future. To put a present value on yet-to-be-delivered earnings, number crunchers use interest rates to discount them. The higher the rate, the less future profits are worth today. More generally, when rates are higher, investors may not be willing to pay as much to bet on less certain, more distant profits.
Of course, this isn’t the first time the tech giants’ share prices have come under fire. They tumbled at the onset of the pandemic in 2020 along with everything else, before climbing to new heights when they turned out to be the winners in a locked-down economy. They were also hammered the last time the Fed hiked interest rates in late 2018, which raised fears about a potential recession. That time, too, they rallied back within a few months.
Eleven months into this selloff, there are few signs that we’re near the end. Inflation is still rampant, and Fed officials have signaled they won’t let up until there’s been more progress in cooling prices. Valuations are cheaper, but still buyers aren’t enticed. Meta traded at more than 50 times projected profits in the years after its 2012 initial public offering. It’s now priced at nine times, in a league with Elmer’s glue maker Newell Brands Inc. and appliance maker Whirlpool Corp.
Things could change as the macroeconomic picture shifts, but for now investors are feeling guarded. “Investors have questioned whether the pivot to the metaverse prevented the company from committing even more capital to other areas of growth,” says Scott Kessler, global sector lead for technology at investment researcher Third Bridge, speaking of Meta. “They made a huge commitment and perhaps it was too much, too soon.”
—With Jess Menton and Elena Popina
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