What Caused Meta’s Stock to Drop in 2022?

Meta Platforms, formerly known as Facebook, established itself as a leading entity in the technology sector, reshaping social connection and digital advertising. The company maintained a prominent market position for many years, driven by its applications including Facebook, Instagram, and WhatsApp. In 2022, Meta experienced a substantial decline in its stock value. This downturn prompted closer examination of factors that impacted its financial performance.

Advertising Business Pressures

Meta’s core advertising business faced significant challenges in 2022 due to data privacy regulations and increased competition. Apple’s App Tracking Transparency (ATT) framework, introduced in 2021, required users to opt-in before applications could track their activity across other apps and websites. This privacy feature severely hindered Meta’s ability to gather data for targeted advertising and measure campaign effectiveness, leading to an estimated revenue loss of $10 billion to $13 billion. Reduced data availability meant advertisers found campaigns less efficient, prompting some to reduce spending.

Competition for digital advertising intensified, particularly from short-form video platforms. TikTok emerged as a formidable rival, attracting a significant portion of user attention and advertising budgets. This competitive pressure contributed to a deceleration in Meta’s ad revenue growth, with the company reporting its first year-over-year decline in advertising revenue in Q2 2022. The broader digital advertising market also experienced a slowdown, as economic uncertainties led advertisers to tighten budgets, affecting Meta’s primary revenue stream.

Metaverse Investment Costs

Meta’s ambitious pivot towards the metaverse contributed to investor concerns due to its substantial financial outlays. Reality Labs, Meta’s metaverse division, incurred significant operating losses throughout 2022. These losses amounted to $13.7 billion for the full year, a notable increase.

This considerable investment in a long-term vision, with uncertain immediate returns, generated skepticism among investors. Reality Labs develops virtual and augmented reality hardware and software, including Oculus Quest headsets. While Meta views this as a crucial investment for its future, the market questioned the scale and timing of these expenditures, especially when the company’s core business faced headwinds. The financial burden of these metaverse initiatives weighed heavily on Meta’s overall profitability and stock valuation.

Shifting User Engagement

Changes in user behavior and engagement across Meta’s platforms presented another challenge. Facebook, the company’s flagship platform, experienced a decline in daily active users for the first time in late 2021 and early 2022. While monthly active users across Meta’s family of apps continued to see modest growth, the stagnation in daily engagement on its primary platform was a notable concern.

Competition for user attention intensified, particularly from video-centric platforms. TikTok’s rapid growth in short-form video content captured a significant share of user time, especially among younger demographics. This shift compelled Meta to prioritize its short-form video product, Reels, across Instagram and Facebook. Although time spent on Reels increased, these videos did not monetize at the same rate as traditional content, impacting overall revenue per ad.

Broader Economic Headwinds

The wider macroeconomic environment in 2022 played a role in Meta’s stock performance. The United States experienced high inflation rates, peaking around 9.1% in mid-2022. In response to persistent inflation, the Federal Reserve initiated aggressive interest rate hikes throughout the year.

These economic shifts fostered risk aversion among investors. Rising interest rates generally tend to depress growth stock valuations, including technology, as future earnings become less valuable. Fears of a potential recession grew, leading to a broader market de-rating of technology companies as investors sought stable assets. This market sentiment contributed to Meta’s stock decline, alongside company-specific challenges.