Facebook and Snap Stock are both cheap. Because stocks may still be struggling.

Social media may be the most important innovation of the 21st century. In 2022, if an event doesn’t reach a social stream, it never really happened, like the tree falling in a forest that can’t hear it around.

But 20 years after Friendster started the industry, something else has become clear about social media: It’s not a particularly good business. Based on traditional accounting metrics,

Snapchat

Parent Snap (ticker: SNAP ) has never turned a full-year profit.

Twitter

( TWTR ) has just two profitable years to show for its nearly decade as a public company.

Pinterest

( PINS ) finally made money in 2021, but Wall Street predicts a return to losses this year.

For much of its existence, the industry’s struggles were covered by

Facebook
‘small

prevalence. Facebook.com became a human operating system. It was a brilliant idea executed perfectly. He couldn’t help but make money. But in retrospect, Facebook wasn’t all that different from a fad diet. It made everyone feel good. then he made us feel guilty. And eventually, it mostly stopped working.

Last week, smaller Facebook rival Snap said it was cutting 20% ​​of its workforce, or about 1,200 jobs, while canceling non-core projects such as its flying selfie camera known as Pixy.

“We must address the consequences of our lower revenue growth and adjust to the market environment,” Snap co-founder and CEO Evan Spiegel wrote in a letter to employees.

Meanwhile, Twitter’s future is tied up in a Delaware courtroom, where it will try to force Elon Musk to complete his purchase of the company, even as he regularly undercuts the business itself.

Most of Wall Street has been caught flat-footed by the social media struggles. But not everyone. In 2017, Brian Wieser at Pivotal Research downgraded Facebook stock, making him only one of two analysts with a Sell rating on the stock.

“With each passing year, digital advertising is getting closer and closer to a point of market saturation,” Wieser wrote in his July 2017 downgrade note.

At the time, Facebook was trading at $172. The stock — newly named Meta Platforms ( META ) — closed Friday at $160, meaning investors who bought Facebook shares five years ago and held on have lost money. During the same period, you would be better off owning your property

IBM

(IBM), which itself was dead money, but at least it paid a dividend.

Procter & Gamble

( PG ), Ford Motor ( F ) and McDonald’s ( MCD ) are among the stocks that easily outperformed Facebook’s five-year price appreciation.

I spoke with Wieser last week about what everyone got wrong and what lessons we can learn from the miscalculations.

“What I think has been missing in a lot of Wall Street and, frankly, in most of the companies themselves, is that they are essentially advertising businesses,” says Wieser.

Social media companies became just one more example of startups claiming that technology could change the fundamentals of business. I think so

We work

in real estate,

Teladoc Health

(TDOC) in medicine and Peloton Interactive (PTON) in fitness. As we’ve learned over the past year, market reality ultimately still trumps technology.

Wieser says his strength in covering Facebook was his experience at an advertising agency before going to work on Wall Street. He never lost sight of the fact that advertising revenue over time grows roughly in line with inflation-adjusted gross domestic product. This means growth rates close to 5%. “Investors’ expectations of a duration of 20% or 30% growth rates were unrealistic and unsustainable,” he says.

Meanwhile, social media companies tended to buy their own marketing. Across Silicon Valley, Wieser says, “they don’t care or necessarily care about understanding advertising. They succeed in spite of themselves in advertising.”

When Snap went public in 2017, the company described itself as a “camera company” in the front line of its prospectus. That description still tops the company’s annual report, even though the same document states: “We generate substantially all of our revenue from advertising.”

Wieser left Wall Street in 2019 and now serves as global president of Business Intelligence for

WPP
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(WPP) ad buyer GroupM. While Meta’s stock continues to fall, analysts have clung to the idea that it remains a disruptive force. Forty of the 56 analysts who cover Meta still rate the stock at Buy or equivalent, according to FactSet. There are only two sales left. The average price target is $221, more than 35% above current levels.

Rosenblatt Securities analyst Barton Crockett has one of 14 Hold ratings, but is only one of three analysts who have a price target below Meta’s current price. Its target of $156 implies a downside of 2.5%.

“For much of social media, we’re going through a painful, but inevitable, and ultimately healthy, process of transitioning from juggernaut to business,” says Crockett. “And what we see are various stages of denial, and finally acceptance, of the inevitable.”

Snap’s cost-cutting announcement last week—and the cancellation of the Pixy flying camera—was the “arm in the business moment,” Crockett says. “They focus on what’s important, where they can feel strongly that they have a return.”

Meta, on the other hand, still thinks like a juggernaut that can overcome economies of scale. Today, Facebook reaches about three billion people, but user growth has stalled.

Crockett says the company’s transformative ambitions — at the expense of its advertising reality — “are emblematic of the refusal to accept and live with who you are, which is a business.”

Social media devotees may point to TikTok as the next new thing. But TikTok is another ad business that isn’t likely to bend the long-term ad spending curve.

There are already signs that TikTok’s emphasis on short-form videos, while addictive to users, may not translate as well to ad dollars. In a recent report titled “Has TikTok Ruined the Internet?” Bernstein analysts note that TikTok generates two-tenths of a minute for every user minute spent in the US versus 1.4 cents for Facebook and half a cent for YouTube.

“Nobody likes change, but on the internet, it’s evolve or die,” write the Bernstein analysts. “But what if something more discrediting happens that destroys advertisers’ finances, creators’ art and consumers’ attention along the way…all desperate for that 15-second hit?”

Bernstein says “stay tuned” for the answer, but I think we already know what happens next.

Write to Alex Eule at alex.eule@barrons.com

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