Convergencia Research, Consultoría especializada en Latinoamérica y Caribe
Friday, February 04, 2022

Historical fall of Meta: its shares sank 27% and it lost US$230 billion of market capitalization

Investors responded to a quarterly balance that showed a reduction in users for the first time in 18 years, although it was just 0.05% lower. For analysts, the financial factor is important here, stressed by the upcoming rise in interest rates in the US.

A perfect storm hit Meta and other tech companies. It is not only about financial questions but also about doubts relating to the future of these firms.

The fall in value of the shares of Meta Platform, the parent company of Facebook, which this Friday -in the premarket- barely rose a few points, responds to a slight drop in its quarterly numbers that do not justify that collapse of 27% of its value.

The number of daily active users on the social network Facebook fell to 1.929 billion in the last quarter of 2021, compared to 1.93 billion in the previous quarter. That is, one million less, or 0.05%. This is the first decrease in the number of users in 18 years, since the founding of Facebook in 2004. The company based this decrease on the migration of younger users to rival platforms such as TikTok and YouTube.

Collapsing the value of the shares due to this data implies assuming that investors do not believe that the company has the capacity to face its competitors and recover its growth path. If so, it would be a unique case of a multi-million dollar revenue firm without the ability to compete.

Continuing with Meta's balance, its net profit grew by 43% in 2021, to US$46.753 billion, and its revenues stood at US$117.929 billion, an increase of 37%. But from the company they warned of a slowdown for the first quarter of 2022. This is due to a cut in advertising expenses by advertisers on Facebook; and the impact of privacy changes in Apple's operating system, which make it harder for brands to target and measure their advertising on Facebook and Instagram.

Investors, meanwhile, note that the metaverse is still a long way from starting to replace falling earnings.

The financial bubble. After the Meta results report, which generated a barrage of sales of its shares and a loss of value of some US$230 billion, another problem can also be found, a strictly financial one. And this would explain why the shares of Spotify and Pay Pal also fell.

The setbacks would reflect, strictly speaking, the greater scrutiny of investors on companies in a context of imminent rises in interest rates by the US Federal Reserve, the central bank of that country.

In general, technology stocks trade at prices much higher than their earnings indicate. That stock market exuberance has been fueled by the cheap money that has existed since 2008 and that was the answer to the financial crisis at that time. The scheme is simple: investors borrow at very low rates, close to 0% to buy shares (it could be bonds, raw materials or gold) and simply wait for them to rise in value; 24 or 48 hours after taking out the loan, they sell the shares for more than they bought them for, repay the loan plus interest, and keep the difference. According to the IIF calculations, every day some US$100 billion are moved around the world with these operations.

The rise in interest rates, scheduled for March, cuts off this enormous financial speculation, deflates the speculative balloon and the value of shares begins to fall. This is what happened to Apple when, in September 2020, it lost some US$180 billion of stock value in the face of the Fed's announcement that it was going to raise rates. Until yesterday, that was the record for the daily drop in the value of its shares.

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