Facebook Could Have Its First Ever Revenue Decline

Facebook Could Have Its First Ever Revenue Decline

• Big Technology is a newsletter about tech and society by independent journalist Alex Kantrowitz. To get it in your inbox each week, you can sign up here.
• Meta’s revenue could be declining due to rising inflation, competition from TikTok, and the war in Ukraine.
• The companies’ share prices have already dropped by 45% this year.

Meta may report its first-ever revenue decline when it releases its second-quarter earnings next week, a potentially stunning slowdown for a business that once seemed to have no ceiling.

Until last year, Meta reliably grew revenue by 20% or more each quarter, demonstrating formidable business strength even amid reputational chaos. But as a series of economic and competitive problems set in, the company’s revenue growth slowed significantly and may now disappear altogether. The contraction would punctuate an enduring, post-covid slide for Meta, whose share price has dropped 45% this year.

“This company is facing this perfect storm,” said Mark Mahaney, sr. managing director of internet research at Evercore ISI. “It has been for a while.”

The perfect storm Mahaney references includes: 1) Rising inflation, which cooled off the ad market. 2) A strengthening dollar, which diminished international revenue. 3) A new Meta content format in Reels, which it’s been slow to monetize. 4) Competition from TikTok, which makes money from that exact format. 5) The war in Ukraine, which ended Meta’s Russia business. And 6) Apple’s anti-tracking moves, which made it difficult for Meta’s advertisers to optimize their ads.

Meta may still turn in meager revenue growth next week, but it will be a far cry from its heyday, and many factors working against it are worsening. Mahaney, for instance, estimates international revenue issues — due to the strong dollar — could be a 2-4% impediment to growth alone. TikTok isn’t cooling off either. “TikTok’s ad revenue growth is up triple digits year over year,” Mahaney said. “That growth has got to be coming from somewhere.”

For Meta, declining revenue could lead to cutbacks on ambitious projects throughout the company. Already, Mark Zuckerberg’s slashed hiring plans, ramped internal goals while encouraging voluntary exits, and warned of economic disaster. “This might be one of the worst downturns that we’ve seen in recent history,” Zuckerberg told the company recently. In the ultra-competitive social media field, cutbacks can give competitors a lane to lay waste to your business.

The best case scenario Meta anticipated for the second quarter was just a 3% revenue increase. The company provided an expected revenue range between $28 billion – $30 billion in the quarter. If it lands in the middle — $29 billion — that would be less than the $29.1 billion it made in the same quarter last year. And, looking around, the signs aren’t encouraging.

Snap Inc.’s dreadful second-quarter results, released Thursday, indicate the market for ad-supported social media might be troubled. Snap missed revenue and earnings expectations, refused to offer guidance for the coming quarter, and its share price fell 26% in after-hours trading. Meta fell along with it, dropping 4.68%.

If you’re bullish about Meta’s business, there’s still plenty of room for optimism. The company is wildly profitable, has potential revenue coming in when it figures out Reels (which it’s further emphasizing), and advertisers are starting to return after absorbing Apple’s anti-tracking changes. “Facebook spend is climbing back,” said Sara Livingston, head of customer solutions at Rockerbox, a marketing analytics company. “We’re seeing brands adjust to the new normal.”

Still, the days of Meta’s torrid advertising growth appear over, making its other bets even more critical to its long-term success. Those bets better start paying off soon.