Meta under pressure to grow users, compete with TikTok in Q2 earnings

Facebook-parent Meta Platforms Inc. will need to prove users remain highly engaged with its legacy platforms as the social media giant faces growing challenges while pursuing its long-term metaverse vision, analysts say.

Meta faces an increasingly uncertain ad market as consumers combat rising interest rates and marketers brace for a potential economic recession. The company also recently updated Facebook and Instagram LLC to address competition from rival social app TikTok Inc. Meta is scheduled to report its second-quarter earnings results July 27.

While Meta has thus far been able to navigate past challenges, chinks in the armor appeared at the end of 2021 when Facebook lost a million daily active users from its namesake platform. While it returned to growth in the first quarter of 2022, analysts say continued growth is paramount.

"[Drops in user growth] are just going to send a shockwave to investors that will pour into the narrative that TikTok is winning," Loup Ventures managing partner Gene Munster told S&P Global Market Intelligence.

Advertising headwinds

In terms of ad revenue, brands are less motivated to invest in ad placements right now, said Tejas Dessai, internet research analyst at New York-based ETF research firm Global X ETFs. Essentially, lagging supply chain lead times have decreased advertisers' budgets because organizations do not want to market products that will not get to store shelves.

Advertisers are also struggling to accurately predict consumer buying preferences as high inflation decreases spending power and the pandemic continues to disrupt historical patterns.

Meta reported advertising revenue of $27.00 billion in the first quarter, up 6% year over year. That compared to 20.1% growth in the fourth quarter of 2021. The company reported double-digit percentage gains in ad revenue throughout last year.

Engagement plays

Facebook added about 3 million global users in the first quarter of this year, with European losses related to Russia's war in Ukraine offset by gains in the rest of the world.

To keep younger users engaged amid rising competition, Meta recently moved Facebook and Instagram toward a content discovery model, where users are fed content from accounts or pages in which they may have some interest but do not necessarily follow.

The company also previously rolled out features that users compared directly to TikTok, including Reels, which allows short-form videos to stay posted for longer than Instagram's prior 24-hour limit.

The efforts to make Instagram more TikTok-esque have attracted criticism from some key influencers, including beauty mogul Kylie Jenner.

In February 2018, Jenner's tweets criticizing a redesign of Snapchat were widely seen as driving a drop in Snap Inc.'s share price.

Instagram head Adam Mosseri addressed the platform's critics in a statement released July 26, saying the new features needed more work but video would become an increasing priority for Instagram.

Frequent changes in the platform could deter user engagement in the long term, said Zaven Nahapetyan, a former Facebook engineering manager. People expect a certain type of product experience, and if it changes too much, it annoys existing users, Nahapetyan said.

"I think in a lot of ways, it's going to be hard for Meta to change their product enough for it to be able to compete with TikTok without upsetting their existing audience," Nahapetyan said.

Regulators to the rescue?

Competition from TikTok could be a temporary issue, especially if the Republican party takes the White House in 2024, noted Munster from Loup Ventures.

TikTok faces growing scrutiny over the platform's data-sharing practices with Beijing, and Munster expects the U.S. under GOP leadership would move to block the Beijing Byte Dance Telecommunications Co. Ltd.-owned company from American devices.

That would deal a major blow to TikTok, but would make things easier for Meta, said Munster. The Facebook parent company has had to divide its priorities between short-term efforts and its long-term ambition to move into the metaverse, a widely perceived future iteration of the internet where people virtually participate in everyday activities.

Meta is now 80% focused on short-term concerns and 20% on metaverse development, Munster said. Six months ago, the analyst said he would have called an even split on the priorities.