Facebook changed the world.  Why did the stock stop working?

Social media is perhaps the most influential innovation of the 21st century. In 2022, if an event doesn’t make it to a social feed, it never happened, like a tree falling in a forest without you hearing about it.

But 20 years after Friendster kicked off the industry, something else has become clear about social media: It’s not a very good business. Based on traditional accounting metrics,


Snapchat

parent Snap (ticker: SNAP ) has never posted a full-year profit.


Twitter

( TWTR ) has only had two profitable years in nearly a decade as a public company.


Pinterest

( PINS ) finally made money in 2021, but Wall Street is predicting a return to losses this year.

For most of its existence, the industry’s struggles were masked by


Facebook
‘c

dominance. Facebook.com has become a human operating system. It was a brilliant idea that was perfectly executed. There was no way not to make money. But in retrospect, Facebook wasn’t all that different from a fad diet. He made everyone feel good; then made us feel guilty. And finally, it mostly stopped working.

In the past week, Facebook’s smaller rival Snap said it was cutting 20% ​​of its workforceor roughly 1,200 jobs, while canceling non-core projects like its flying selfie camera known as Pixy.

“We must now face the consequences of our lower revenue growth and adapt to the market environment,” Snap co-founder and CEO Evan Spiegel wrote in a letter to employees.

Meanwhile, Twitter’s future is tied up in a Delaware courtroomwhere he will try to force Elon Musk to complete the purchase of the company, even though he regularly disparages the business itself.

Most of Wall Street was caught off guard by the social media struggles. But not all. Back in 2017, Pivotal Research’s Brian Wieser downgraded Facebook stock, making him one of only two analysts with a Sell rating on the stock.

“With each passing year, digital advertising is getting closer to a point where the market is saturated,” Wieser wrote in his July 2017 downgrade note.

Facebook was trading at $172 at the time. The stock — under its new name Meta Platforms ( META ) — closed Friday at $160, meaning investors who bought Facebook stock five years ago and held onto it lost money. During this same period, you would have been better off owning


IBM

(IBM), which itself was dead money, but at least it paid a dividend.


Procter and Gamble

( PG ), Ford Motor ( F ) and McDonald’s ( MCD ) were among the stocks that easily outpaced Facebook’s five-year rally.

I spoke with Wieser last week about what everyone got wrong and what lessons we can learn from the miscalculations.

“What I think a lot of Wall Street and, frankly, most of the companies themselves have missed is that they are basically advertising businesses,” Wieser says.

Social media companies have become just another example of startups claiming that technology can change the fundamentals of business. I think


We are working

in real estate,


Teladoc Health

(TDOC) in medicine and Peloton Interactive (PTON) in fitness. As we’ve learned over the past year, market realities still ultimately trump technology.

Wieser says his advantage in covering Facebook is his background at an ad agency before he started working on Wall Street. He has never lost sight of the fact that advertising revenue has grown over time roughly in line with inflation-adjusted gross domestic product. This means growth rates close to 5%. “Investors’ expectations of sustaining growth rates of 20% or 30% were unrealistic and unsustainable,” he says.

Meanwhile, social media companies tend to buy their own marketing. On the other side of Silicon Valley, Wieser says, “they don’t necessarily care or care to understand about advertising. They succeed in spite of themselves in advertising.”

When Snap went public in 2017, the company called itself a “camera company” in the first line of its prospectus. That description still sits at the top of the company’s annual report, although the same document states: “We generate substantially all of our revenue from advertising.”

Wieser left Wall Street in 2019 and now serves as Global President of Business Intelligence for


WPP
‘c

(WPP) ad buyer GroupM. While Meta’s stock continues to fall, analysts are sticking with the idea that it remains a disruptive force. Forty of the 56 analysts covering Meta still rate the stock at Buy or equivalent, according to FactSet. There are still only two sales. The average price target is $221, more than 35% above current levels.

Rosenblatt Securities analyst Barton Crockett has one of 14 hold ratings, but he is only one of three analysts who have a price target below Meta’s current price. Its target of $156 suggests a downside of 2.5%.

“For much of social media, we’re going through a painful but inevitable and ultimately healthy transformation process from giant to business,” says Crockett. “And what we’re seeing are various stages of denial and ultimately acceptance of the inevitability.”

Snap’s cost-cutting announcement last week — and canceling his Pixy flying camera– was his “business transition moment,” says Crockett. “They focus on what’s important, where they can feel strongly that they’re getting a return.”

The meta, on the other hand, still thinks like a juggernaut that can overcome economies of scale. Today, Facebook reaches approximately three billion people, but user growth has stagnated.

Crockett says the company’s metauniverse ambitions — at the expense of its advertising reality — “is emblematic of a refusal to accept and live with who you are, which is business.”

Social media believers may point to TikTok as the next new thing. But TikTok is another ad business that isn’t more likely to bend the long-term ad spending curve.

There is already an indication that TikTok’s emphasis on short-form videos, while addictive to users, may not translate into ad money. In a recent report titled “Did TikTok Ruin the Internet?” Bernstein analysts noted that TikTok generates two-tenths of a cent for every user minute spent in the US, compared to 1.4 cents for Facebook and half a cent for YouTube.

“Nobody likes change, but on the Internet it’s do-or-die,” Bernstein analysts wrote. “But what if something more low-key happens that ruins advertisers’ economics, creators’ art and consumers’ attention along the way…all desperate for that next 15-second hit?”

Bernstein says “wait” for the answer, but I think we already know what happens next.

Write to Alex Yule c [email protected]

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