Insights

Here’s How Meta Plans to Survive This Downturn

When management at Meta Platforms (NASDAQ: META) guided for “slower growth” in 2022 (of between 3%-11%) back in February, investors got nervous. This was not the company they were familiar with, which had consistently delivered high-quality growth in the past. They feared that Meta had severe problems dealing with the rise of ByteDance’s TikTok and the change in Apple‘s mobile operating system’s data privacy policies.

As Meta reported its first- and second-quarter results for 2022 in April and just last week, respectively, investors’ fears were confirmed.

Image source: Getty Images.

Meta’s 2022 first-half results were ugly

Meta began 2022 by delivering some shocking numbers.

In the first quarter, revenue grew just 7% year over year, while net income fell 21%. Just as investors braced for an equally challenging second quarter, the tech company delivered a set of unprecedented numbers — revenue fell 1% year over year, while net income plunged 36%. Meta blames these ugly numbers on a weakening macroeconomic environment, changes in Apple’s smartphone data privacy policies, and the impact of competitors’ short video services.

The company plans to turn around its business via the following strategies.

Meta aims to become leaner and fitter

As a start, Meta management thinks the company is getting too heavy and slow. It plans to reduce its employee headcount in the coming months to address this concern.

In particular, CEO Mark Zuckerberg wants Meta to do more with fewer resources to come out stronger in the long run. He wants to shrink some teams to redirect energy to the more critical projects, continue investing in key priority areas, and develop new leaders who can excel under challenging situations.

It makes some sense for the company to streamline its operations. Doing so removes unnecessary spending, and instills financial discipline into the tech giant. It also brings back focus, which will be necessary to manage the broader economic downturn. Tightening belts will also help Meta conserve resources, which it can redirect into areas that matter the most to the company’s future direction.

Meta doubles down on AI and Reels

Meta is backing two critical initiatives to reposition the company for future growth.

The first is artificial intelligence (AI), which will improve customer experience (and engagement) and should also help to address some of the problems arising from the change in Apple’s data privacy policy.

For example, AI will increasingly drive content recommendations across Facebook and Instagram. Presently, around 85% of Facebook and Instagram feeds come from people and accounts the users know or follow. The remaining 15% comes from AI recommendations. In the future, AI-driven content recommendations will grow to become a more significant part of the pie, doubling by the end of next year. Meta predicts that these changes will improve content recommendations’ quality and user engagement.

On top of that, using AI allows the company to deliver personalized ads based less on outside data, which is particularly important if the company is to find a workaround for changed data privacy policies.

Another essential part of Meta’s turnaround strategies is its short video app Reels. The rise of short video apps like TikTok has diverted user time and attention from Facebook and Instagram, reducing the marketing budget businesses spend on Meta’s platform. With Reels, Meta aims to mitigate such impacts and reposition itself for future growth.

While still early days, there are signs that Reels is picking up steam, as it already accounts for 20% of the time people spend on Instagram. Besides, it also helps to improve engagement levels on Facebook and Instagram. For instance, Meta reported a more than “30% increase in the time people spent engaging with Reels across Facebook and Instagram.” Part of these improvements resulted from the improvement in the AI model, which further highlights the importance of artificial intelligence to Meta’s future.

What all this means for investors

It’s been a rough time to be an investor in Meta. Over the last few months, Meta stock is down more than 56% from an all-time-high price of $384 set last September.

Still, investors should not give up on the company yet. After all, the management team is working hard to address the headwinds. The tech company is tightening its belt and doubling down on strategic initiatives to get growth rates back to their historic norms.

But these investments will take time to pay off. Investors need to be patient to see these initiatives bear fruit.

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. Lawrence Nga has no position in any of the stocks mentioned. 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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