Bank of America Downgrades Meta Over Spending on Broken Metaverse

Bank of America downgraded Meta (NASDAQ:META) from “buy” to “neutral” over ad spending and Meta’s high spending on metaverse development. It slashed its target price from $196 to $150. META has been sliding for most of 2022 and is trading at $130.60 as of October 24, 2022.

Bank of America especially called Meta’s spending on its attempt at a metaverse property as an “overhang” on the stock. Internal reports indicate that even many Meta employees are beginning to give up on it due to bugs and poor user experience.

Metaverse in General Not Doing So Well

For most of 2022, the performance of most metaverse properties has been dismal when compared to last year’s hype. Trading volume for virtual land plots collapsed by 98%. It’s rare to find a metaverse property’s native token that was in the Top Ten in January 2022 and didn’t drop by more than half – sometimes by more than 80%. (This is comparing the values for October 24, 2022 and January 6, 2022.)

Active users have also been dismal. DappRadar put The Sandbox’s unique wallet interactions at 630 per day. Earlier this month, it was at 654. Number of daily transactions dropped by 31.59% on October 24, 2022.

Meta likely isn’t helping itself by having already spent $15 billion on its own metaverse property, Horizon Worlds. The Wall Street Journal reported that employees simply find it unusable. A leaked memo had a project manager scolding employees, “If we don’t love it, how can we expect our users to love it?”

Meta isn’t giving up, though. The hype around metaverse might have died down by a considerable amount, but that isn’t stopping it from jumping in with both feet. It even made this video showing what it could look like — if it ever gets Horizon World up to snuff.

Meta Gets Crosswise With Regulators and Lawmakers

Meta previously failed to launch a U.S. Dollar-backed stablecoin that it called Libra, which it later rebranded to Diem. The Diem partners failed to agree on a direction for it. Meta may have underestimated how much pushback it would get from lawmakers and regulators who said it was unprepared to deal with matters like money laundering and consumer protections. Meta ended up selling Diem to Silvergate Capital.

Its spats with regulators also included threatening to suspend news content on its platforms in Canada. Canadian lawmakers introduced a bill called the Online News Act, which will compel platforms like Google and Facebook to pay news publishers for content. Australia has a similar law. In a statement, Meta complained about not being invited to give its input for the bill.

“We feel it is important to be transparent about the possibility that we may be forced to consider whether we continue to allow the sharing of news content in Canada,” said a Facebook spokesperson.

Canadian Heritage Minister Pablo Rodriguez defended the bill, “It’s about the future of journalism in our country. The act is about ensuring that news outlets in Canada get fair compensation for their work.”

Meta had to concede defeat in a battle with the UK’s Competition and Markets Authority (CMA) over its ownership of the GIF maker Giphy. The CMA ordered Meta to sell Giphy to a “suitable buyer” – likely meaning one that isn’t associated with Meta. Meta initially fought back, saying that finding a buyer would be difficult since GIFs are going out of style. However, the GMA claimed that Meta’s ownership of Giphy would have a negative impact on the UK’s display advertising industry. This marks the first time the CMA successfully unwound an acquisition by a Big Tech company like Meta and will likely mean that Meta will have to sell it for less than the $315 million it paid for it.

Bank of America’s other concerns include Instagram usage headwinds, generally high capital expenditures, and poor quality Reels content. Meta may have some general cleaning up to do before it can convince Bank of America that Horizon Worlds won’t become an additional $15 billion elephant in the room.