META 0.00%↑ reports its first ever revenue drop in Q2 2022. As mentioned in my previous post, they are facing many challenges and things are not pretty. Revenue dropped 1%, net income plummeted 36% and the Q3 guidance is abysmal. They are projecting an up to 10% YoY revenue decline for Q3 2022. MAUs and DAUs are pretty flat, which is better than expected. But headcount grew a whopping 32% YoY. Given that revenue is declining, it’s no surprise they are trying to right size the company.
Facebook’s biggest challenge is that TikTok is eating their lunch. To counter this threat, they are pivoting their apps to be more TikTok like. There’s quite a backlash for this but we will see how things turn out in the next few quarters. According to Zuck’s statement, user engagement has increased with this ongoing change. As a Facebook user, I am not too thrilled about this pivot. Seeing dancing videos from strangers is not the reason I go to Facebook. Interestingly, Zuck didn’t mention the word “TikTok” in his earnings statement. “WhatsApp” was also not mentioned. Does that mean WhatsApp might be spun out to relieve the regulatory pressure? We will see.
There’s also the Apple privacy change. But I believe the revenue has been reset to reflect the impact of this change. Sure there can still be some incremental impact down the road but the magnitude is going to be smaller and it is probably going to be countered by the various improvements Facebook make.
In my opinion, the biggest elephant in the room is this metaverse pivot. Apparently, Zuck is betting the whole company on metaverse. This is quite shocking to me and the reason why I sold all my $FB before it became $META. This bet is extremely risky. It's not really built on Facebook's core competency, which imo is the connected graph and fast iterative data driven development cycle. Facebook is a growth company, not a platform company. They even coined the term “Growth Hacking”. This is quite a different mindset from building hardware and logistics. Plus, how can he be so confident that metaverse has a trillion dollar future and Facebook would own it? Nobody can predict the future so precisely. They are a 500B company and they are betting their future on one thing that is basically pre-product market fit(???!!!). This boggles my mind.
In contrast, to stay relevant, Alphabet placed many bets and hoped some of them would work out in the long run. That strategy makes way more sense to me. They had a few successful bets with this strategy: G-suite, Waymo, Android. They did have a bunch of flops too like Google Glass, Google Loom , Google Fiber, etc. But failure of a bet is never going to jeopardize the company. On the other hand, Zuck is driving the company to a binary outcome. If metaverse doesn’t materialize as expected, Facebook would be in a very difficult position.
Finally, they announced the transition of CFO. In less than a year, Meta’s COO, CFO and CTO are all stepping down. I worked at Facebook from 2006-2011 so I know these people’s backgrounds. Instead of adding some fresh flood, Zuck is replacing old-timers with older-timers. With these changes, he is making his tight inner circle even tighter. AFAIK, all the newly appointed executives are super smart and capable people and have been with the company for 14+ years. But all three had less than 5 years of full-time working experience before Facebook. In contrast, Sheryl, Schrep and Dave were already very well accomplished seasoned executives prior to Facebook. In short, Zuck is creating an even stronger echo chamber with these executive transitions. I suppose this is necessary for his metaverse bet but I suspect the final outcome is either going to be very very very good or very very very bad.