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After Alphabet’s earnings miss, Meta ‘needs new ideas’ to stave off TikTok threat

·4 min read
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Chinese-owned video sharing app TikTok has surged in popularity in recent years, causing a stir among investors and social media behemoths.

The short-form video platform has captured the attention of Gen Z social media users, creating a big problem for industry titan Meta.

Ahead of Meta’s first-quarter earnings release on Wednesday, Meta shares were trading around 1.5% lower. That comes after Google parent company Alphabet reported a rare earnings miss on Tuesday—and as platforms like Facebook and YouTube are doubling down on efforts to stave off their newfound competitor.

The rise of TikTok

Earlier this month, a Piper Sandler survey of more than 7,000 U.S. teens found that TikTok has overtaken Snapchat as adolescents’ social media platform of choice. Meta-owned Instagram rounds out the top three.

Meanwhile, data from Cloudfare shows that between September and December last year, Tiktok.com was the world's most popular website, while Facebook.com came in third place. A year earlier, TikTok’s domain had been the seventh most popular website, while Facebook.com was in second.

According to Hootsuite, TikTok was the most downloaded app of 2021, with 656 million downloads—marking the third consecutive year it held the top spot. Instagram, the second-most downloaded app, was downloaded 545 million times in 2021, Hootsuite’s research says.

While TikTok woos social media’s younger users, Facebook is struggling to keep them. Last year, a leaked internal memo reportedly revealed that the teen user rate on its flagship platform had declined by 13% since 2019 and was projected to decline a further 45% over the next two years.

In 2020, TikTok revealed in a court filing that its global monthly active users had risen by almost 800% in just over two years, CNBC reported. And Insider Research projects that by 2025, TikTok will approach 1 billion users, noting in February that “by and large, TikTok’s ascent to global phenomenon has been incredibly quick.”

Meta has clearly taken TikTok’s rise on board—in the summer of 2020 it announced the launch of Reels, Instagram’s answer to the surge in demand for short-form video content. And earlier this year, the Washington Post reported that Meta had hired a consulting firm to turn the U.S. public against TikTok.

Ed Moya, senior market analyst at OANDA, told Fortune on Wednesday that Facebook’s stock had been “pummeled” in recent months, partially due to the market share the company is losing to TikTok.

“Younger people are using TikTok, they’re not really using Facebook, and this shows you that TikTok is winning the social media race,” he said. “This poses a big problem for Facebook, and it’s probably why you see them try to diversify their revenue streams in terms of the metaverse and all these other ventures.”

Noting that Meta stock is heavily discounted, Moya added that the company “needs some new ideas that will get investors excited, because right now the bear sentiment is rather extreme.”

A threat to YouTube?

But investors aren’t just worried about TikTok’s impact on Meta—the platform has established itself as a legitimate rival to other big players in the social media space.

In an earnings call on Tuesday, Alphabet executives were asked whether TikTok had played a part in the company’s first-quarter revenue miss, which had been attributed in part to a slowdown in YouTube advertising sales.

YouTube advertising sales reached almost $6.9 billion in the first quarter, which marked a year-on-year increase of around 14%, but according to Reuters missed analysts’ expectations of $7.5 billion.

YouTube’s advertising revenue also dragged behind Google search revenues, which saw growth of 24% from a year earlier.

While Philipp Schindler, Alphabet’s senior vice president and chief business officer, conceded that there has been “significant investment” and “a ton of innovation” in the online video industry, he noted that there are still more than 2 billion logged-in users visiting YouTube every month.

Back in September, TikTok announced it had reached 1 billion monthly users.

More people are creating content on YouTube than we've ever seen before,” Schindler said on Tuesday.

He added that Alphabet is heavily invested in Shorts, YouTube’s own short-form video sharing platform. Alphabet CEO Sundar Pichai told investors during the call that Shorts is generating 30 billion daily views.

But Alphabet’s latest earnings report appears to have made investors nervous—even with its executives emphasizing that the war in Ukraine impacted YouTube advertising.

Share prices were down by around 3% on Wednesday.

Angelo Zino, senior equity analyst at CFRA Research, downgraded Alphabet stock from strong buy to buy on the back of the company’s earnings release, slashing his 12-month price target by $800 to $2,600.

“Although we like YouTube’s growth prospects (e.g., online shopping, short-form video), we note tough comps, TikTok competition, and slowdown in direct-response ads,” Zino said in a note on Wednesday.

However, Bank of America analysts said in a note Wednesday that versus its peers, Alphabet has a more stable business. “YouTube [is] seeing strong engagement,” analysts said, speculating that this could help with TikTok concerns.

This story was originally featured on Fortune.com