Within 24 hours of Meta stock crashing, Facebook parent company Meta wiped out over a quarter of its market cap. The incident is undoubtedly more prominent than a normal incident, in which a company of this magnitude lost an estimated $250 billion.

Mark Zuckerberg announced at the end of October that his company was changing its name to Meta. The founder’s letter hints that it’s an upcoming chapter in technology and promises to be a problem solver for small businesses. But is the company heading towards its goal? What does the future hold for Meta, especially after the recent loss? What are the reasons for this loss? And most importantly, how are investors reacting to this market shift? Let’s untie these knots one by one.

The central theses

• Facebook’s parent company suffered a $252 billion annihilation on February 3, 2022.
• It’s the most significant drop in the market cap of publicly traded US companies in one day, dwarfing Apple’s $180 billion loss in 2020.
• Facebook also saw its first drop in daily active users. Global daily users fell to 1.929 billion from 1.93 billion in the third quarter of 2021.
• It’s a big loss for the company, especially after the earlier dispute with employees turned whistleblowers.

Credit: statistics

Factors behind such depreciation

• Increasing decline in Facebook users

Facebook – Meta’s flagship app – was founded in 2004. The user drop in the third quarter of 2021 was the largest since. Meta had suffered a major setback because Facebook is a popular app around the world and the smaller number of users reflects the dip in popularity. It also reflects users opting for Facebook alternatives. We will examine this factor.

• The disinterest persists

The company is also grappling with a decline in users in Africa and Latin America. This is another issue as the organization needs to grow outside of its US domain. It’s not the first drop for Meta in other countries, however.

Interestingly, last year Frances Haugen – a whistleblower – brought to the fore internal documents warning Facebook of the loss of young users. One of the documents presented states that “teen engagement is declining in most western and several non-western countries”.

• Strong competition from Tiktok

According to Zuckerberg, video-sharing app Tiktok is a massive problem for Meta. “People have a lot of options for how they want to spend their time, and apps like TikTok are growing very quickly,” he claimed on a call. Chinese-owned Tiktok has about a billion users worldwide. Most of them are content creators and youth groups. This is one of the main reasons why Meta struggles to compete in the fledgling consumer market.

Reels are the counter to Tiktok; That’s why Meta has high hopes. Zuckerberg explains, “That’s why our long-term focus on Reels is so important, as is our work to ensure our apps are the best services for young adults.” However, he recognizes that this means slower sales growth in the short term.

97% of revenue in Meta depends on advertising. It helps users by creating their profiles and matching them with the advertiser’s requirements. Suppose an advertiser is looking for a customer in a specific location with a specific demographic and interests. In this case, Meta may target those ads to specific groups based on the information it has collected about them.

• A hit from other competitors

Meta, which also owns Instagram and WhatsApp, claims that recent changes to Apple’s iOS software for iPhones have hurt the company. Apple says users must now give companies like Meta permission to collect data about them when they browse the web. As a result, users have reacted negatively and the company’s ad targeting has become less effective.

During a conference call with investors on Wednesday, Sheryl Sandberg, Meta’s chief operating officer and architect of Facebook’s advertising strategy, said the company has ways to target users with less data. “There are many things small and large businesses can do to take advantage of the many targeting and measurement tools we have,” she added.

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From the investor’s point of view

Investors aren’t as motivated to invest in Meta as they used to be. But is there a silver lining? It’s worth asking when numbers look like this from a bird’s eye view.

Total revenue increased to $33.7 billion in the last quarter of 2021, compared to $28.1 billion in the same prior year. However, net income, a US earnings measure, was $10.3 billion for the quarter, slipping nearly $1 billion from a year ago. Still, the data shows that Meta remains a thriving and profitable business.

Meta released Q1 guidance that revealed sluggish usage of its social media apps and trends in ad sales. It will take several quarters, if not years, to fix the deficiencies. Meanwhile, the corporation’s transition to the metaverse, a big bet on an uncertain technology, will require repairs. Metaverse has yet to pass the business litmus test. Therefore, a huge game with unproven technology is dangerous.

At the end of a long week of technical results, it was evident that Meta’s issues were diverse and were not indicative of a broader industry meltdown. Alphabet, Google’s parent company, reported solid gains on increased demand for ad space on Google Search and YouTube. The next day after Meta’s horrific report, smaller competitors — Snap and Pinterest — seemed like a gift to investors with better numbers, which included Snap’s first-ever profit.

A coherent future

Metaverse needs patience and money to see further growth. The word “Metaverse” refers to a merging of the physical and digital worlds where individuals conduct their professional and social lives using a combination of virtual and augmented reality. Zuckerberg is so confident that Meta is the next big thing in tech that he’s rebranded Facebook Inc.

However, there are still many years to go before technology becomes a fully integrated part of people’s lives. For example, Meta’s virtual reality unit, Reality Labs, which makes the best-selling Oculus VR headsets, reported a $3.3 billion loss on revenue of less than $1 billion. Still, since this is the future of Meta’s business, you should expect revenue to grow along with expenses. As such, Meta’s investors and team will have to be patient to see significant growth.