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Meta CFO cries ‘wolf’ again with bleak Facebook outlook — but he may be right this time

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Chief Financial Officer David Wehner has warned of impending financial doom at Facebook so many times that this column has dubbed him “the Chicken Little of Silicon Valley.”

But this time, the sky may actually be falling.

Meta Platforms Inc. shares FB, +1.25% plunged nearly 23% in Wednesday’s extended session after another warning from Wehner, who has overshadowed strong results for years with concerns about slowing growth that never really arrived. This time, however, the CFO’s caution arrived with other worrisome signs: Facebook’s first-ever quarterly decline in active users, competition that is actually managing to hurt the dominant social network, and an assault from the biggest company in the world — not to mention an earnings and forecast miss.

There was also a big negative number: $10 billion, which is the advertising revenue Wehner expects Meta to lose this year because of Apple Inc. AAPL, +0.70% and its privacy changes.

“If you kind of aggregate the changes that we’re seeing in iOS, that’s sort of the order of magnitude. We can’t be precise on this, it’s an estimate,” Wehner said while dropping that bombshell number in a conference call Wednesday. “We’ve got ranges on the impact to our business, but we think it’s a substantial — the substantial headwind to work our way through, and obviously we’re working hard to mitigate those impacts and continue to make ads relevant and effective for users.”

Internet companies have been concerned about the impact of Apple’s changes to iOS for more than a year, from Snap Inc. SNAP, -4.72% to Pinterest Inc. PINS, -8.93% to Facebook. The changes let consumers opt out of sharing their data or having it tracked by third parties like these companies, putting only Apple — which has its own growing advertising business — in charge of that juicy data.

Apple is just one of Meta’s “headwinds,” as executives kept calling them, and another one is named TikTok. Facebook admitted that competition was taking a bite as the rival app continues to grow, and that its competing service, Reels, is growing but not providing much in the way of ad revenue compared with other Facebook products. Meta’s automated advertising systems are “not as tuned to the new format,” so there are few ads for this newer form of content right now, said Sheryl Sandberg, Meta’s chief operating officer, on the call.

Sandberg noted that the company has been through these types of product transitions before, and it has a “playbook” to work through them and to get them to monetize. Facebook’s product transitions, though, are usually the result of its copying leading competitors, such as when it made its own version of Snapchat’s features with Stories, and now its TikTok clone, Reels.

“The experience we have for monetizing Stories is directly applicable, we’re not starting from scratch,” she said. “Overall engagement will grow as a part of this and that’s why we’re optimistic about the future, but there’s a lot of work to do here.”

According to Chief Executive Mark Zuckerberg, though, the future is actually in the company’s new namesake, the “metaverse.” Facebook showed just how ridiculously far away that dream is by breaking out the financials for Facebook Reality Labs for the first time. Its revenue in the fourth quarter was $877 million, made up mostly of Oculus virtual-reality headsets, while the operating loss was $3.3 billion. For the full year 2021, Reality Labs’ operating loss was a whopping $10.2 billion, on revenue of $2.27 billion.

“You’re also going to be able to access these worlds from your Facebook or Instagram app as well, and probably more over time,” Zuckerberg told analysts Wednesday. “So this will enable us to build even richer social experiences where you can connect with friends in the metaverse, whether they’re in VR or not.” But he also added that while Meta is making “meaningful progress” in the seven areas it is investing in, “our path ahead is not yet perfectly defined.”

All those factors led to a forecast for year-over-year revenue growth of 3% to 11%, well short of Wall Street expectations and very unlikely to be a sandbag. Scott Kessler, an analyst with Third Bridge, wrote in a brief note to clients that Meta could see single-digit revenue growth for the next quarter, as its business is more severely impacted by Apple’s changes than Alphabet’s Google and YouTube were.

With new competitors taking market share and others blocking important advertising data, Meta’s CFO crying “wolf” this time should probably be taken at face value. The social network looks to be facing the end of a prolonged growth period, and the other side could be ugly.

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