Facebook and Snap Stock are Both Cheap. Why Shares May Still Struggle.

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

Facebook
’s
dominance. Facebook.com became a human operating system. It was a brilliant idea that was perfectly executed. It couldn’t help but make money. But in retrospect, Facebook wasn’t all that different from a fad diet. It made everyone feel good; then it made us feel guilty. And finally, it mostly stopped working.

This past week, Facebook’s smaller rival Snap said it was cutting 20% of its workforce, or roughly 1,200 jobs, while canceling noncore projects such as its flying selfie camera known as the Pixy.

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

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

Most of Wall Street has been caught flat-footed by social media’s struggles. But not everyone. Back in 2017, Brian Wieser at Pivotal Research downgraded Facebook’s stock, making him just one of two analysts with a Sell rating on the shares.

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

At the time, Facebook traded at $172. The stock—under its new Meta Platforms (META) name—closed on Friday at $160, meaning that investors who bought Facebook shares five years ago, and held on, have lost money. Over that same period, you would have been better off owning

IBM

(IBM), which has itself been dead money but at least paid a dividend.

Procter & Gamble

(PG), Ford Motor (F), and McDonald’s (MCD) are among the stocks that have easily outpaced Facebook’s five-year price appreciation.

I spoke to Wieser this past week about what everyone got wrong and what lessons we can learn from the miscalculations.

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

Social-media companies became just one more example of start-ups claiming that technology could alter the basics of business. Think

WeWork

in real estate,

Teladoc Health

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

Wieser says his edge covering Facebook was his experience at an advertising agency before he went to work on Wall Street. He never lost sight of the fact that advertising revenue over time grows roughly in line with gross domestic product adjusted for inflation. That means growth rates close to 5%. “Investors’ expectations for the durability of 20% or 30% growth rates were unrealistic and unsustainable,” he says.

Meanwhile, social-media companies tended to buy into their own marketing. Across 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 labeled itself a “camera company” in the first line of its prospectus. That description still tops the company’s annual report, even though the same document declares, “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
’s
(WPP) ad buyer GroupM. While Meta stock continues to fall, analysts have clung to the notion that it remains a disruptive force. Forty of the 56 analysts covering Meta still rate the stock at Buy or its equivalent, according to FactSet. There are still just two Sells. The average price target is $221, more than 35% above current levels.

Rosenblatt Securities analyst Barton Crockett has one of the 14 Hold ratings, but he’s just one of three analysts who carries a price target below Meta’s current price. His $156 target implies downside of 2.5%.

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

Snap’s cost-cutting announcement this past week—and the cancellation of its Pixy flying camera—was its “juggernaut to business moment,” Crockett says. “They’re focusing on what’s important, where they can feel strongly that they get a return.”

Meta, on the other hand, is still thinking like a juggernaut that can overcome economics through scale. Today, Facebook reaches roughly three billion people, but user growth has stalled.

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

Social-media believers might point to TikTok as the next new thing. But TikTok is another advertising business that’s no more likely to bend the long-term curve of ad spending.

There’s already indication that TikTok’s emphasis on short-term videos, while addictive to users, might not convert all that well to ad dollars. In a recent report titled “Has TikTok Ruined the Internet?” Bernstein analysts note that TikTok generates two-tenths of a cent for every user minute spent in the U.S. versus 1.4 cents for Facebook and half a cent for YouTube.

“No one likes change, but in internet, it’s evolve or die,” write the Bernstein analysts. “But what if there’s something more deprecatory taking place ruining advertiser economics, creator art, and consumer attention spans along the way…all desperate for that next 15-second hit?”

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

Write to Alex Eule at [email protected]