Here is Why Shares of Meta & Amazon Drop Up to 25% in a Single Day

This has not been a good week for big tech; the stock prices for Amazon and Meta have tumbled down by 19% and 25% respectively this week.

At the core, both of these tech companies have the same reason for its drop in stock prices.

Namely, wider macroeconomics woes.

Since the global economy is currently facing a slowdown due to inflation and rising energy prices – with some countries doing worse and sliding into recession – this means the cost of production and the price of products are becoming more expensive simultaneously.

With inflation and rising prices, it means that consumers’ purchasing power is shrinking.

Take Singapore for instance, most hawkers and restaurants have increased their prices by 50 cents or more, which means that people can purchase less quantity of food than they originally could before, even though their salaries have remained the same.

Therefore, consumers are becoming more prudent with their expenses and spending less.

For businesses, even though borders are reopening, and we are returning to pre-pandemic conditions, it means little when consumers are not willing to spend.

It does not help matters that businesses are directly affected by rising energy prices; higher costs of operating and production means that they will have lesser profits (total revenue – costs = profits).

Amazon: Expectations vs Reality

Now, Amazon is just a conduit for businesses and consumers.

If people aren’t buying or businesses are selling less, it would be harmful for Amazon’s net sales.

For the third quarter of 2022, Amazon reported US$127.1 billion for its net sales, which is lower than the analysts’ expectations of US$127.46 billion.

However, these figures are not the main blow to its business confidence, which consequently led to the dropping of stock prices.

Rather, the main cause was Amazon’s guidance on the holiday quarter that worried investors.

Upon the release of third quarter reports, Amazon stated that it expected net sales of between $140 billion and $148 billion in the fourth quarter, in contrast to the analysts’ prediction of $155.15 billion.

Of course, the weak forecast is not completely Amazon’s fault.

In the past week, several Big Tech companies have also been announcing downbeat quarterly reports, which has only worried investors at large about the health of the global economy.

Additionally, Amazon is coming down from a pandemic-high where its business boomed as more consumers resorted to delivery service based products.

Regardless of how big Amazon is, it is not impervious to the effects of an economic slowdown.

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Meta: Spending Too Much On The Future

For Meta, it has been confronted with a few problems, including rising competition for its Instagram platform from rivals such as TikTok.

With Apple’s privacy policy changes, Meta has been having difficulties targeting and measuring advertising, which is one of its main sources of revenue.

On Wednesday (26 Oct), Facebook reported quarterly revenue of $27.7 billion, a decline of more than 4% over a year and its second consecutive quarterly decline.

Thus, its profit has skidded 52% to $4.4 billion.

Citing the global slowdown, Meta warned that the fourth quarter will be more or less the same, so it is expecting the revenue for the fourth quarter to be around $30 billion to $32.5 billion.

However, analysts were expecting sales of $32.2 billion.

Another contributor to Meta’s smaller profits is its investment/expenditure into infant projects, such as artificial intelligence and virtual reality headsets.

However, these projects will take years, if not decades, before it starts paying off, and investors are not confident that they will eventually pay the bills.

After all, revenue from Reality Labs, its metaverse unit which houses the virtual reality headsets, have incurred losses of $3.67 billion, compared to the $2.67 billion a year ago.

The company is expecting more operating losses to fund its “significant growth” in 2023.

The total estimated expenses for Meta in 2022 are around $85 billion to $88 billion.

The tech company expects its 2023 expenses to rise further, predicting that it will be between $86 billion and $101 billion, even though it has been taking measures to cut costs and freeze hiring recently.

While Zuckerberg’s focus on the future is commendable, it has drawn his attention away from the instabilities of the present reality. 

There are far too many experimental bets on Meta’s board right now, and it is making investors feel queasy.

Having said that, the 25% drop in Meta shares is just a reflection of the investors’ confidence.

Wiping off more than $89 billion off Meta’s market capital had to hurt though.

Amazon must be feeling their losses deeper; once its stock dropped after the bell, $190 billion of its market capitalisation was wiped out instantaneously. 

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