Facebook’s Flop

Friday Reflection | February 4, 2022

A massive decline in the value of Meta Platforms, the parent company of Facebook, captured headlines this week. The stock declined more than 26% on Thursday following the company’s disappointing Q4 earnings report that also showed a slowing of new users joining the social media platform. The decline translates to a loss of more than $230 billion of market cap, which ranks as the biggest one-day dollar decline ever for a US company.[1] To put that in context, there are only 30 companies in the S&P 500 worth more than the amount of Meta stock’s loss on Thursday. It was equivalent to erasing the entire market value of Nike or Costco in one day and was nearly triple the combined value of Facebook’s much smaller social media competitors Snap, Twitter, and Pinterest.
 
We don’t write frequently about the fortunes or follies of an individual company since our client portfolios are broadly diversified, but there are two reasons to acknowledge the social media company’s decline. First, Meta is one of the largest companies globally and the decline had a direct impact on major stock market indices. Second, the changing landscape for Meta has broader lessons about the lifecycle of investments in innovative companies.

Market Impact

One benefit of diversified stock indices is that they offer insulation from the full impact of price declines of any single stock – even if the largest constituents, primarily comprised of mega-cap tech companies, do have outsized influence. At the start of the week, Meta represented 2% of the S&P 500 and approximately 5% of the NASDAQ index. The historic 26% plunge in the stock price on Thursday only translated to a 1.3% decline in the S&P 500 and a 3.7% decline in the NASDAQ. For diversified client portfolios that include international stocks as well as bond exposure, the impact was even more muted.
 
The challenges facing Meta Platforms may seem dramatic in the moment. In context, it is only one company within a diverse market, and other economic factors continue to influence the direction of market prices. Earnings from tech giants Alphabet (parent company of Google) and Amazon partially soothed investor concerns; both reported strong earnings growth in Q4, and their shares are up materially.[2] Further, the economy added 467,000 new jobs last month, defying the Omicron concerns and far exceeding analyst expectations – though the good news has been met with mixed investor reactions as it increases the likelihood of a Fed rate hike in March. We are confident that diversified portfolios will continue to smooth broader volatility over the short-term, allowing investors to focus on the long-term.

Technology Adoption Lifecycle

Originally studied in the 1950s and 1960s, the technology adoption life cycle is a sociological model that describes the adoption or acceptance of a new product or innovation, according to the demographic and psychological characteristics of the adopter groups.[i]  In the process of embracing new technology, the first group of people to use a new product are called “innovators” and are followed by “early adopters”. These groups are more risk oriented and willing to try new products knowing that there will be bugs to work out and the technology may never take off, but they accept those risks in order to be on the cutting edge of innovation.  Once a technology is established, then comes the “early majority” and “late majority”, who are willing to adopt new ways of doing things but desire more evidence that the technology works well and has staying power.  Lastly, the final group called “laggards”, represents the cohort of people who resist technological change until it is inevitable.

Investment Adoption Lifecycle

For investors in innovative companies, there can be a similar lifecycle. When a company is a startup with lofty ambitions but a limited track record, the risks of investment are considerable. Sure, some IPOs and disruptive technologies have turned into Google or Amazon, or Facebook, but many more have floundered and gone bankrupt before reaching commercial success – failing to leap the “chasm” in the graphic above. Investors who target these companies are akin to the early adopters and are willing to tolerate the risk of loss and volatile results as long as there is the potential for significant upside. As a company matures and revenues stabilize, the risk for new investors decreases and the potential upside may decrease as well. Early adopters value potential reward more than price stability, while the early and late majorities – both in technology adoption and investor appetite – require a threshold of certainty to be met, and they’re willing to accept a lower upside in exchange for reduced risk.
 
For Meta, their flagship Facebook platform appears to be attracting the late majority, but it has already lost the early adopter and innovators to new platforms like TikTok. Early adopter investors may similarly be moving on to new investments that have higher potential upside. This doesn’t mean the business model is broken, but it does mean that its valuation multiple and its price need to adjust downward to reflect slower growth in the future.

Stability Mixed with Opportunity

Our global economy has faced similar transitions in recent years as the pandemic accelerated many arcs of change. Leaps forward in the adoption of remote work, which previously only existed in a small subset of companies, has significantly expanded into the early majority. Renewable energy and biotechnology have had material advances in recent years, and companies in those areas still represent a balance of potential upside as well as risk while the technologies are still being developed.
 
For our clients, we manage balanced portfolios that intentionally tilt toward larger, more stable and mature companies, while including just enough speculative growth to build wealth over the long-term. Speculative companies that bring new technologies or new ideas to the market will continue to be a source of growth as well as volatility that complements a larger portfolio built for long-term resiliency. As individual companies rise and fall in the future, our diversified client portfolios and index exposure will continue to balance the opportunity for growth with preservation of liquidity and security in the present.

Resources

1 Meta Platforms Stock Ends Day in Historic Market Capitalization Plunge Barrons
2 Amazon shares soar on cloud revenue beat and huge profit gain from Rivian stake CNBC
3 Crossing the Chasm in the Technology Adoption Life Cycle B2U

Brian Kozel, CFP 

About Brian Kozel, CFP®

Brian Kozel is a Partner at North Berkeley Wealth Management. Brian helps clients feel confident as they navigate their financial journey.

Read more about Brian

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This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

By |2022-02-18T14:43:44-08:00February 4th, 2022|