Meta’s growth comes to screeching halt as company projects first revenue drop

For the first time in nearly a decade, Meta's explosive growth has come to a halt, as the Facebook parent company forecast its first decline in revenue since it went public.

Meta, in its second-quarter earnings report on Wednesday, said it expects third-quarter revenue of between $26bn and $28.5bn - lower than the $30.52bn analysts predicted.

The disappointing results come as the company faces a generally weak ad market and pushes a complete overhaul of its brand, pivoting from its core social media product to offerings in virtual reality in 2021. It also follows difficult earnings from other tech firms including Snap, Twitter and Netflix, as fears of a recession grow.

"We seem to have entered an economic downturn that will have a broad impact on the digital advertising business," chief executive officer Mark Zuckerberg said on a call with investors on Wednesday. "The situation seems worse than it did a quarter ago."

For the second quarter ending 30 June, Meta said total revenue, the bulk of which comes from ads, fell to $28.82bn from $29.08bn a year earlier. Meta shares fell nearly 5% in after hours trading following the rare backslide.

Meta's earnings further underscored an inflation-induced slowdown in the digital ad industry, which has been booming for decades as companies tapped the power of the internet to reach consumers. Tech firms are also struggling to maintain booming growth seen during the pandemic, which bolstered online activity as more people quarantined at home.

In addition to the broader economic downturn, Meta faces a string of unique challenges to its business, including stiff competition from TikTok and Amazon for ads and a revenue hit from Apple's privacy changes to its mobile operating system iOS.

The company has attempted to stop young users from fleeing its platforms by bolstering its short-form video content. Meta reported a 30% increase in time spent on Reels, its copy of rival TikTok, across Instagram and Facebook. However, those videos do not monetize at the same rate as traditional content, Zuckerberg said on the call, and will take time to stabilize.

"In the near term, the faster that Reels grows, the more revenue that actually displaces from higher-monetizing surfaces," he said. "Obviously, there is a cannibalistic impact, but the net impact is positive."

Zuckerberg repeatedly stressed the massive impact of Apple's 2021 change to its operating system. The company allowed users to opt out of digital tracking, torpedoing Facebook advertising revenue, and the company revealed in its second quarter report that the average price per ad had dropped 14%.

"Apple's iOS privacy changes mean that Meta has lost some of the rich data tracking that powers its ad business," said Tom Johnson, global chief digital officer at market analysis firm Mindshare Worldwide. "It will be hoping that its efforts to create a more frictionless commerce experience on the platform will compensate for this over time."

In the call with investors, Zuckerberg said the advertising downturn underscores the importance of shifting to the metaverse - which will create a platform that Meta controls entirely.

"Given some of the product and business constraints that we face now, I feel even more strongly now these platforms will unlock hundreds of billions of dollars - if not trillions over time," Zuckerberg said.

But scaling the metaverse has been an uphill battle, as Meta sinks billions into the project. Reality Labs, the business unit responsible for building the metaverse, recorded a $2.8bn loss in the second quarter.

The company may also have additional regulatory hurdles to scale, as it was served Wednesday with an injunction from the Federal Trade Commission from buying virtual reality company Within.

"The metaverse is full of promise and possibility, but it lacks maturity and at the moment is more revenue drain than revenue driver for Meta," Johnson of Mindshare Worldwide said.

Reuters contributed to this report