Meta sees sales fall for first time as inflation chokes ad sales

Meta Platforms Inc issued a gloomy forecast after posting its first quarterly sales decline on Wednesday, with recession fears and competitive pressures weighing on digital ad sales.

Rabbits from the Menlo Park, Calif.-based company were down about 4.6 percent in extended trading.

The company expects third-quarter revenue to fall to $26 billion and $28.5 billion, respectively, which would mark its second consecutive year-over-year decline. According to Refinitiv IBES data, analysts had expected $30.52 billion.

Total revenue, which consists almost entirely of advertising sales, decreased 1 percent to $28.8 billion for the second quarter ended June 30, compared to $29.1 billion a year earlier. According to Refinitiv, the number slightly missed Wall Street’s forecast of $28.9 billion.

The company, which operates the world’s largest social media platform, reported mixed results for user growth.

Monthly active users on flagship social network Facebook came in slightly below analysts’ expectations at 2.93 billion in the second quarter, up 1 percent year-on-year, while daily active users topped estimates at 1.97 billion.

Like many global companies, Meta is facing some revenue pressure from the strong dollar as foreign currency sales are lower in dollar terms. Meta said it expects headwinds for revenue growth of 6 percent in the third quarter based on current exchange rates.

However, the meta-results also suggest that online ad sales fortunes could diverge between search and social media players, with the latter being more affected as ad buyers fluctuate in their spending.

Alphabet Inc, the world’s largest digital advertising platform, reported an increase in quarterly revenue on Tuesday, with sales at its biggest moneymaker — Google Search — beating investors’ expectations.

Both Snap Inc and Twitter missed revenue expectations last week and warned of a slowdown in the advertising market in the coming quarters, sparking a broad selloff across the sector.

In addition to economic pressures, Meta’s core business is also experiencing a unique strain as it competes with short-video app TikTok for users’ time and aligns its ad business with privacy controls introduced by Apple Inc. last year.

The company is therefore simultaneously conducting multiple expensive overhauls, overhauling its core apps, and improving its ad targeting with AI, while investing heavily in a longer-term bet on “Metaverse” hardware and software.

Meta executives told investors they were making progress replacing ad dollars lost as a result of Apple’s changes, but said it’s being offset by the economic slowdown.

They added that Reels, a short video product that Meta is increasingly adding to users’ feeds to compete with TikTok, is now generating over $1 billion in revenue annually.

However, Reels is cannibalizing more profitable content that users might otherwise watch and will continue to be a headwind for profits into 2022 before eventually boosting revenue, executives told analysts on Wednesday.

“They’re very affected by everything,” said Kim Forrest of Bokeh Capital Partners, citing the economic slowdown and competition from TikTok and Apple.

“Meta has a problem because they’re chasing TikTok and when the Kardashians talk about not liking Instagram…Meta should really pay attention.”

On Monday, two of Instagram’s biggest users, Kim Kardashian and Kylie Jenner, both shared a meme imploring the company to abandon its switch to TikTok-style content suggestions and “make Instagram Instagram again.”

However, CEO Mark Zuckerberg seemed undeterred.

About 15 percent of content on Facebook and Instagram is currently recommended by AI from accounts that users aren’t actively following, and that percentage is set to double by the end of 2023, he told investors on the conference call.

For now, at least, the metaverse portion of Meta’s business remains largely theoretical. In the second quarter, Meta reported $218 million in non-advertising revenue, which includes payment fees and sales of devices such as its Quest virtual reality headsets, up from $497 million a year earlier.

Its Reality Labs unit, which is responsible for developing Metaverse-oriented technologies like the VR headsets, reported revenue of $452 million, up from $695 million in the first quarter.

Though Meta has slowed investment lately as cost pressures mounted, executives reassured investors that it’s still on track to release a mixed reality headset later this year called Project Cambria, aimed at professionals.

Meta first included the Reality Labs segment in its results earlier this year when it revealed the unit had lost $10.2 billion in 2021.

Operating profit margin fell to 29 percent from 43 percent in the second quarter as costs rose sharply and revenue declined.

In November, Chief Financial Officer David Wehner will become Meta’s first Chief Strategy Officer. Susan Li, Meta’s current vice president of finance, will become CFO. Meta sees sales fall for first time as inflation chokes ad sales

Fry Electronics Team

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