Meta’s Investors Get a Reality Check

For the first time since the company started reporting the metric as a public company, Facebook’s daily active users declined on a sequential basis in the fourth quarter.

Further, Meta warned its first-quarter revenue would be more than $2 billion below Wall Street’s forecast at the midpoint of its guidance, noting impacts to both impression and price growth, specifically citing increased competition from video-first platforms like ByteDance’s TikTok.

Meta said these impacts would also be compounded by macroeconomic factors like inflation and supply-chain disruptions damping advertisers’ budgets. The result was a stunning 21% selloff for Meta’s stock in after-hours trading.

Perhaps also for the first time in its life, Meta can’t just throw money at this problem. It will invest tens of billions in the coming years toward its next phase in building the metaverse, but little of that will be of near-term help. Meta may have a new reporting segment in Reality Labs, but 97% of its revenue was still coming from advertising in the fourth quarter. This won’t change overnight: JP Morgan analyst

Doug Anmuth

predicts non-advertising revenue will likely remain a low-single-digits percentage of total revenue over the next few years.

For that reason, Meta is now scrambling to get bigger in what today’s users clearly want on social media: Video. Over the past month, Instagram head

Adam Mosseri

has been very clear about his app’s intentions to focus on its short-form video product, Reels, as well as to increasingly target young adults. And on Wednesday, Meta Chief Executive Mark Zuckerberg listed Reels as his company’s first priority for this year. The downside of this focus: Mr. Zuckerberg said Reels would monetize at lower rates versus Feed and Stories ads, weighing on advertising-revenue growth in the near term.

But here is the good news: If everyone sees Meta as just a company that has lost its edge in social media, there may be opportunity for a long-term investor. Meta’s massive stock move Wednesday shows investors consider the metaverse to be merely a place where Mr. Zuckerberg is floating around trying to sell you new things.

To be fair, Mr. Zuckerberg isn’t doing himself many favors. On Wednesday’s conference call, he described Meta’s path ahead as “not perfectly defined.” That followed a third-quarter conference call in which he led with the assertion that “if you’re in the metaverse every day, then you’ll need digital clothes and digital tools and different experiences,” probably causing a good portion of disbelievers to immediately close the web browser.

The metaverse may not be for you, but that is OK. Mr. Zuckerberg also said back in October that Meta’s goal was “to help the metaverse reach a billion people…this decade.”

Mathematically, this is likely achievable, whether you believe in the so-called next-generation Internet or not. Stifel’s Mark Kelley estimates there will be 2.5 billion gamers globally, excluding China, by the end of this year. If true, Meta would only have to reach 40% of them over the next eight years to reach its goal. Factor in Mr. Kelley’s 5% estimated compounded annual growth rate for gamers, and the target becomes even more achievable.

Meta’s apps may not be as cool as they once were, but they have collectively managed to reach nearly half the world’s population on a monthly basis—a record unmatched in social media. Recall more than a billion people were visiting Marketplace, launched in 2016, every month as of the first quarter of last year. That made for an adoption rate of 35% of legacy “Blue” app monthly users in less than five years.

Meanwhile, almost 10% of Facebook’s users were visiting Shops within a year of their 2020 launch, according to company disclosures. There are a lot of ways to connect with friends today and probably even more places to shop. But there won’t be too many entry points into the metaverse, likely making Meta’s an even more attractive destination for interested gamers.

Meta never needed anything to work as badly as it needs the ‘verse now. But if the selloff persists, betting on its future just might be in your favor.

Write to Laura Forman at laura.forman@wsj.com