Insights

5 Factors That Led to Meta Platforms First Revenue Decline

It wasn’t all too surprising when Meta Platforms (NASDAQ: META) reported a year-over-year decline in revenue in the second quarter. The results were foreshadowed by weak results from its peers in social media, and analysts expected revenue to come in roughly flat, compared to the year-ago period.

There are a lot of factors negatively impacting Meta’s revenue right now. Some will stick around for awhile; others will dissipate quickly. Here are five big ones for investors to know.

1. Economic uncertainty

We’re in the midst of global economic uncertainty. Rising inflation has affected food, gasoline, and other essentials and has left many households with less money to spend for discretionary purchases.

Supply chain bottlenecks have left many store shelves empty. U.S. gross domestic product (GDP) has now fallen for two consecutive quarters. It’s a lot harder to justify ad spend for a lot of businesses in this environment.

That’s reflected in both the second-quarter results and management’s outlook for the third quarter. It’s unclear when the economy will turn around and advertising demand will improve. But the impact is being seen throughout the industry, so it doesn’t indicate a weakness from Meta itself.

2. Stronger dollar

The dollar strengthened against foreign currencies during the first half of 2022. Meta generates a significant portion of its revenue — over 54% last quarter — from countries outside of the United States. As a result, management said revenue growth would have been 3% on an foreign exchange neutral basis, versus the 1% decline it experienced.

Exchange rates will continue to weigh on third-quarter results. “Foreign currency will be an approximately 6% headwind to year-over-year total revenue growth in the third quarter, based on current exchange rates,” management shared in the earnings release.

Again, this is an industrywide issue. But Meta has greater exposure to foreign markets than many of its peers, which means foreign-exchange rates will play a bigger factor in its results.

3. Apple iOS changes

Apple (NASDAQ: AAPL) made changes in iOS 14, released last fall, that required apps to ask for permission to track users’ data across other apps. The ability to track users who saw an ad on Facebook or Instagram and then made a purchase at a store’s website or mobile app was key for Meta. It let advertisers know how well their ads converted into sales.

Without that data, advertisers are less sure how valuable Facebook and Instagram ads are. That’s impacting their willingness to pay, and pushing them to seek platforms with more measurable advertising.

The good news for investors is that Meta (and the rest of the industry) will mostly lap the impact of iOS 14 in the third quarter. While it remains a challenge for Meta, which is working on artificial intelligence (AI) to improve ad measurement, the impact on revenue growth will be neutral going forward.

4. Reels growth

One big area of investment for Meta is its Reels format, which it features on both Instagram and Facebook. Management said Reels accounts for 20% of time spent on Instagram during the first quarter, and engagement with the format across Facebook and Instagram increased 30% in the second quarter.

That’s notable because Reels still monetizes at lower rates than Feed and Stories in Instagram and Facebook. While management says Reels is additive in time spent, it’s still somewhat cannibalistic of those other formats. As a result, average ad prices and revenue per minute of engagement declined.

Long term, investors should expect the growth of Reels to become additive to overall user monetization, but there’s an adjustment period, just as we saw with the growth of Stories.

5. Competition

While most of Meta’s competition in social media is experiencing similar headwinds, it shouldn’t be lost that there’s an impact from advertisers having more choices in the space. The growth of TikTok, specifically, has had a clear impact on Meta, and CEO Mark Zuckerberg hasn’t been shy about addressing the competitive pressure of the app in the past.

When marketers cut spending on social media advertising as a group, the impact of competition is most apparent. And that’s what happened in the second quarter. The pressure is on Meta to win share of digital ad spending by offering superior ad products and maintaining engagement on its apps.

To that end, Meta has copied a lot of what’s made Tiktok successful, including the short-form video format and AI-generated content recommendations. It’s gotten some pushback for the changes, but it could ultimately make the apps more engaging.

Overall, Meta remains a strong option for advertiser dollars with more data and more users than any of its competitors. As it works through some of the headwinds, it could come out much stronger, proving the sell-off after its latest earnings report is a great buying opportunity for Meta stock.

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. Adam Levy has positions in Apple and Meta Platforms, 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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