Monday, 15 April 2024

Meta’s Latest Challenge: Advertisers Are Revolting. Should Investors Be Worried?

by BD Banks

Meta Platforms (NASDAQ: META) has been no stranger to controversy, but in the eyes of investors, the stock has done everything right in the past year and a half. Meta’s stock price has soared more than 300% since the start of 2023 as ad revenue growth has bounced back. The company has slashed expenses following its “year of efficiency,” and has regained investor trust.

However, there are now warning signs that momentum could be falling apart.

Advertisers have taken to social media, saying that the company’s ad platform is broken and that ad rates are unrealistic and unsustainable. Some small and medium-sized businesses, which make up Meta’s core advertising customers, have pulled back on ads, shut off advertising on Facebook and Instagram entirely, or shifted their budgets to other platforms like Alphabet‘s Google and ByteDance’s TikTok.

You can see some of the complaints posted to X below.

How Meta got here

Meta slashed more than 20,000 jobs last year in an effort to increase profitability, flatten the management structure, and streamline the business. CEO Mark Zuckerberg has been pleased with the results, and not just because profits are up. On a recent earnings call, Zuckerberg said, “I feel like I’ve really come around to thinking that we operate better off as a leaner company.”

That might be true, but based on the protests above, it seems like the social media giant may have cut too close to the bone. Last April, layoffs of engineers and related tech teams reportedly hammered employee morale, and one Meta advertiser I spoke to said they think layoffs are directly responsible for the problems with the advertising platform. They said Meta’s “entire ad platform feels broken.”

Meanwhile, advertisers are going to other platforms. Though it’s not a total storming-off, even from those who are upset. Cody Plofker, whose post from X is above, told Bloomberg recently that the bad of marketing with Meta comes with the good. “There is a lot of volatility, but there is also a lot of upside as well,” he said.

What it could mean for Meta stock

Meta stock is in a much different position than it was a year ago when it was cheap and priced as a potential turnaround. These days, the stock might not quite be priced for perfection, but it is priced for success at a price-to-earnings ratio of 35, and up until now, there’s been little indication that the layoffs have been anything but a win for the business.

Meta will have to fix the engineering problems in its ad platform. That will cost money, but it’s a cheaper solution than letting its advertisers flee to rival platforms.

It’s unclear if these challenges impacted the company’s first-quarter results, but there are likely to be some questions about it on the first-quarter earnings call on April 24.

Should you sell Meta stock?

Meta has faced plenty of challenges in the past, including the Cambridge Analytica scandal, the Stop Hate for Profit boycott in 2020, Apple‘s ad tracking crackdown, and its questionable pivot to an expensive metaverse development project. Every time, the company has adapted and recovered, which is why the stock again trades at or near all-time highs.

Meta’s products are entrenched enough that even mismanagement of its ad platform wouldn’t kill the business. After all, roughly half of the world’s population uses one of its products regularly, and millions of advertisers depend on it as their primary customer acquisition tool.

However, the advertiser backlash could be significant, and Meta will have to fix it as it will only get worse as it persists. It’s unclear how long it might take to fix it, but it could weigh on the business over at least the next few quarters.

This isn’t a mortal threat to Meta by any means, but investors who are sitting on ample profits after the stock’s surge should consider taking some of those profits off the table, especially with the stock trading at a premium. Further gains with this issue hanging over its head will be difficult.

Should you invest $1,000 in Meta Platforms right now?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Apple, and Meta Platforms. The Motley Fool has a disclosure policy.