Meta’s Plummet Exposes Risks, Opportunities in ETFs

October 27, 2022

Mark Zuckerberg asked investors to be patient—investors aren’t listening. 

Shares of Meta Platforms Inc. plummeted Thursday, skidding as much as 25% in one of its worst-ever declines, despite Zuckerberg’s pleas. The Facebook parent reported sinking revenues and profits, along with hefty expenses. The stock had already dropped 61% this year, erasing $677 billion in market capitalization, according to Bloomberg News. 

Meta, formerly known as Facebook, is the “F” in “FAANG,” but like most of the other companies in that popular initialism, things for the world’s biggest social network aren’t looking so hot right now. 

 

 

Meta’s third-quarter revenues were slightly larger than estimates, but they were down year over year for a second straight quarter. Worse, the firm guided to a bigger fourth-quarter decline, forecasting a drop of more than 7%. 

On its own, investors might have looked past the drop in sales, especially since companies from Snap Inc. to Alphabet Inc. to even Microsoft Corp. have been hobbled to varying degrees by this year’s steep downturn in the advertising industry. 

But Meta said it would continue to spend aggressively to fulfil its metaverse ambitions and compete with fast-growing TikTok. Investors didn’t like that.  

Expenses grew by 19% in the last quarter compared with a year ago, while the company guided to expense growth of 14.5% in 2023. Analysts currently expect Meta’s revenues to grow by around 8% next year, so the expense guidance implies a further decline in Meta’s profit margins. 

After examining the latest numbers, analysts at Jefferies said they see “no signs of expense discipline,” and the company is “going against what investors want.” 

ETF Impact 

Today’s drop in Meta, which wiped out nearly $80 billion from its market cap, dinged ETFs that hold large positions in the stock. 

A glance at the ETF.com stock finder reveals that Meta has a weighting of more than 10% in four ETFs, while it has a weighting of more than 5% in another seven ETFs. 

Taking the biggest beating from Meta’s demise is the Communication Services Select Sector SPDR Fund (XLC), which sagged by 3.5% on Thursday. Meta accounts for a whopping 17% of the ETF’s portfolio, and together with Alphabet, which dropped 9% after its earnings report earlier this week, the two stocks make up nearly 30% of XLC. 

It’s no wonder then that the fund is the worst performer this year among the SPDR sector suite, with a loss of 37% versus 19% for the S&P 500. 

Other ETFs that target the communication services sector, like the Vanguard Communication Services ETF (VOX), the Fidelity MSCI Communication Services Index ETF (FCOM) and the iShares Global Comm Services EF (IXP), also dropped, no thanks to their double-digit weights in Meta.  

Outside of the communication services ETFs, funds that target themes like social media, the internet and (no surprise) the metaverse also sport large positions in Meta and nursed large losses.  

The Global X Social Media ETF (SOCL), the Invesco NASDAQ Internet ET (PNQI) and the Roundhill Ball Metaverse ETF (METV) each dropped around 2% on Thursday. 

The S&P 500 was down about half of a percentage point at the same time. 

Patience & Conviction  

Now that the damage from Meta’s earnings report is done, would-be investors in Meta and ETFs that hold large positions in the stock have a few things to consider.  

The Meta founder and CEO told investors on Thursday’s earnings conference call that investors who are patient and invest with the company, “will end up being rewarded.” 

Under the leadership of Zuckerberg, Meta has been able to deftly navigate the ever-evolving social media landscape, turning into an advertising juggernaut in the process.  

Still, it has to fend off Chinese rival TikTok, arguably its strongest competitor ever. While fighting to keep its users from defecting, Meta must rebuild its advertising technology stack in response to privacy changes that Apple made to the iPhone, which have hobbled Meta’s ability to target and measure ads. 

So, Zuckerberg is probably right about investors in Meta needing patience, but that’s not all they need—they need conviction that he can pull off both things.  

 

Follow Sumit Roy on Twitter @sumitroy2      

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