Insights

1 Risk That Could Crush Meta Platforms Stock

Meta Platforms (NASDAQ: META), the owner of Facebook and Instagram, has dominated the social media landscape for over a decade.

Roughly half the world’s population uses one of its apps at least monthly and it’s one of the most profitable businesses in the world thanks to its strength in digital advertising.

However, with the stock down nearly 60% from its peak last September and the company just reporting its first-ever revenue decline from one quarter to the next (with another one expected in the third quarter), the Facebook parent looks more vulnerable than ever.

The company is facing multiple crises. Apple is cracking down on ad tracking, there’s the sudden rise of TikTok, a macroeconomic downturn is causing a slowdown in ad spending, we have regulatory threats in Europe, Meta is reporting huge losses in the metaverse, the user base is maturing, and longtime Chief Operating Officer Sheryl Sandberg, who has been with the company for 14 years and built the advertising business into the behemoth it is today, is leaving the company. That’s more than a handful of complications.

While each of those factors has played a role in the stock’s collapse over the last year and its reversing revenue growth, one risk seems to be more pertinent than any other right now. That’s the challenge from TikTok, which has forced Meta to reformulate its core apps like Facebook and Instagram around Reels, its short-form video product that is essentially a copycat of TikTok.

Can Reels beat TikTok?

The rapid rise of TikTok has upended the social media industry. The short-form video app reached 1 billion monthly active users nearly a year ago, earlier in its lifespan than either Facebook or Instagram. It has grabbed market share and advertising dollars from competitors like Meta, Snap, and YouTube. 

Meta management doesn’t often mention the China-based app by name, but it clearly views TikTok as a serious threat. In response to TikTok’s rise, Meta has developed its own TikTok-like product, Reels, launching it on Instagram in 2020 and adding it to Facebook last year. Gradually, it’s made Reels a bigger part of the experience on its apps, as it now makes up 20% of the time people spend on Instagram. However, there’s a problem here.

Its users don’t necessarily like Reels and may not want Instagram to become TikTok. In fact, Kylie Jenner and Kim Kardashian have led a backlash against the video product, sharing a post urging the company to “Make Instagram Instagram Again” rather than trying to be TikTok. Instagram did ditch some new products in response to the protest, including a full-screen video feature similar to what TikTok offers, but the company still expects Reels to become a greater part of both Facebook and Instagram.

Though Meta management is confident in the long-term success of Reels, it’s not clear if it can beat TikTok at its own game. As Meta evolves to take on new competition, it also faces the classic innovator’s dilemma, having to navigate the possibility of disrupting itself without hurting its highly profitable core business. Moreover, the Kardashian-led protest shows that morphing into TikTok carries its own risks, including losing the audience that likes the Facebook and Instagram products as they are now.

Will this tried-and-true tactic work again?

Meta seems confident in the Reels strategy in part because this same tactic worked against Snapchat. When Snapchat was gaining market share thanks to the success of Snapchat Stories, Meta simply copied Stories and offered it under a new name on Instagram and Facebook. The Snapchat threat was neutralized and Snap was forced to regroup after losing momentum.

However, TikTok is much bigger than Snapchat ever was, and the short-form video app is essentially all TikTok is, making it more difficult for Reels to beat it. Stories, on the other hand, was just one feature of Snapchat, so it wasn’t the only reason people used that app. It won’t be easy for Meta to out-TikTok TikTok, in other words, especially considering the disruptor’s rapid growth and popularity.

Though Meta may need to evolve to keep its audience, the downside risk here seems greater than the upside potential. In a worst-case scenario, Meta stuffs Facebook and Instagram with Reels videos only to see its core audience balk at the changes, and engagement withers. In this scenario, it both loses the battle with TikTok and leaves its own user base feeling disenchanted.

In a best-case scenario, it neutralizes the TikTok threat and has a new product to feed its advertising machine, but even then the upside seems limited as Meta’s user base appears to be reaching a ceiling — it grew just 4% in the second quarter.  

As Meta stock tries to recover its recent losses, the performance of Reels should be a key factor in the overall performance and trajectory of the business. If Reels can gain favor with users and advertisers, the Facebook parent should be able to return to full health. However, if TikTok continues to gain steam and the backlash against Reels persists, Meta could be in even more trouble than it is now.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Meta Platforms, Inc. and Snap Inc. The Motley Fool has positions in and recommends Apple and Meta Platforms, Inc. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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