Why did Facebook crash 26% in a single trading session

8 Feb 2022 , 10:36 AM

On Thursday 04-February, Meta (the holding company of Facebook) fell by 26% in a single day. In the process, the stock wiped out $232 billion in market cap from the stock in just one day. To put this fall in perspective, the single day market cap fall in Meta is equivalent to the total market cap of Reliance Industries. In terms of market cap wiped out in a stock in a single day, this was the worst fall in history.

If you look at the ten worst single-day value loss in history, five of them pertain to Apple and two to Facebook (Meta). The remaining 3 positions are filled by Tesla, Microsoft and Amazon. But what stands out about the sharp fall in the market value of Meta on 04-Feb is that it could have much wider ramifications. In fact, most analysts apprehend that this fall could be indicative of a larger structural challenge that Meta (Facebook) faces.

Is Facebook just getting too boring and predictable?

That is the question that a lot of users have been asking about Facebook in hushed tones for a long time. One thing that has been hitting users for the last few years about Facebook is, what is the next big idea? Social media was different 12 years back when Facebook was the go-to place for anything to do with social media. Over a period of time, the social media universe itself has become granular and segregated. You prefer to go to Twitter to express a short opinion and put out a serious long opinion piece on LinkedIn.

The rise in the popularity of short videos has been captured by Tik Tok and YouTube Shorts. Tik Tok with 1 billion active users and YouTube Shorts with 6.5 billion daily views are formidable in that space. And those who are keen to indulge in self-promotion still prefer the smooth user interfaces of Instagram. Where does that leave Facebook? The numbers say it all as Facebook active users fell for the first time in 18 years in the Dec-21 quarter.

Apple restrictions have emerged as the key risk factor for Meta

One of the big trump cards of websites like Facebook is the user of trackers that is an integral part of their apps. Facebook uses these apps to customize product offerings to customers so that ads can be better targeted at the right audience. But there is a problem. Most customers are not aware they are being tracked and that raises a serious issue of privacy encroachment. It is to plug this privacy gap that Apple has made significant changes to its iPhone app. Now apps on the Apple platform need to ask their users if they want to be tracked before collecting such data. That is likely to have a significant impact on Facebook.

The problem is that there are over 100 crore iPhone users in the world and this is going to seriously dent Facebook’s ability to target ads. As of the latest full year, Facebook still gets 98% of its revenues from ads. It is estimated that the new Apple policy would deplete revenues of Facebook by nearly $10 billion each year. That was one of the major reasons for the weak guidance given by Facebook for the coming year.

Metaverse Push — Outlays versus outcomes

In a bid to come up with the next big idea, Facebook has already launched its Metaverse. This is almost an alternate version of the internet based on virtual reality (VR) and alternate reality (AR). The problem with Metaverse is the huge gap between sunk outlays and visible outcomes. If you look at the Dec-21 quarter, Reality Labs (the VR / AR unit of Meta) had a net loss of $3.3 billion with full year losses of $10 billion. That is a lot of money sunk in with little by way of outcomes to show the market at this point of time.

That is not all, Mark Zuckerberg has himself confirmed that the Metaverse would require billions of dollars to be sunk in for a prolonged period. That means; in the Metaverse business, the gap between outlays and outcomes is only going to widen in the coming quarters. Effectively, Meta has problems at 3 levels. Firstly, Meta still needs to come up with the next big idea to prevent further fragmentation of the social media space. Secondly, the Apple privacy policy is likely to seriously dent revenues and profits for Meta.

But the biggest challenge to Meta is to make the Metaverse worth the investment and the effort. At some point in the future, the outcomes must match the outlays, and eventually overtake the sunk costs. For now the markets are worried that the combination of all these factors, with serious questions about Meta’s privacy policy and the use of echo chambers, are not great news for Meta. It does look like the pressure on the stock is here to stay.