Can the fastest-growing content format on Meta Platforms revive the price of its stock?

The popularity of TikTok on social media has grown dramatically. In terms of overall mobile downloads in 2018, the app outperformed Meta Platforms' (META -1.19%) Messenger, Facebook, and Instagram, according to SensorTower. Mark Zuckerberg, CEO of Meta, may have seen TikTok as a growing danger at that same moment.

Wall Street, on the other hand, took a little longer to realize how much of a danger TikTok was to the family of applications developed by Meta. One million daily active users were lost between the third and fourth quarters, according to Meta's earnings report for the fiscal year 2021. Even while it might not seem like much, it was the first time ever in the history of the platform that the number of users fell.

In the earnings call that followed, Zuckerberg specifically cited TikTok as a rapidly expanding rival for users' attention. He also stressed the value of Reels, Meta's own short-form video offering, in luring customers among young adults.

The idea that TikTok would dethrone Facebook as the leader of the world's social media was not warmly received by Wall Street. The shares of Meta dropped 64% in 2022.

Reels, a knockoff short-form video format, is Meta's reaction to TikTok's success. Will Zuckerberg's large wager on Reels succeed, though? Let's examine Reels to see whether it can assist Meta in maintaining its social media hegemony.

Falling behind

Facebook rose to prominence as one of the first social media platforms to enter the digital sphere. But for its family of applications to be popular, Meta will need to keep up with the times and appeal to younger generations, particularly those in Gen Z.

These younger folks have substantially shorter attention spans than their older counterparts since they were raised with digital media at their fingertips and cell phones in their hands from birth. According to some analysts, Gen Z has an attention span of eight seconds.

First to capitalize on this phenomena were businesses like TikTok and Snap (SNAP -3.51%), which developed short-form video formats that were well-liked by young users. As these more recent social media platforms drew more users in the crucial 18 to 34 age range for advertising, Facebook started to lose advertising revenue in one of its most lucrative markets.

It was a fresh goldmine for TikTok and Snap. While this was going on, Meta arrived late.

In the near run, Reels harms Meta's company

Reels has become increasingly popular since it was first released on Facebook and Instagram in 2020 and 2021, respectively. Reels' explosive growth damages Meta's near-term revenue figures, but only to investors who are fixated on scrutinizing quarterly statistics.

How can that be? The service now has a relatively low ad load from Meta because Reels is still growing in popularity with international users. The format earns less money than the company's more established social media offerings like News Feed and Stories. Due to the quick growth of Reels' user involvement, it is replacing user interaction with more lucrative formats, which is a revenue headwind. Today, this challenge costs Meta $500 million every quarter, claims Zuckerberg.

Competitive advantages of Reels

Reels entered service after its rivals, yet it still has several benefits over TikTok and Snap.

First, employing one of the strongest content discovery engines in the market, driven by artificial intelligence, Reels may quickly overtake TikTok in engagement. Since outstanding content is only useful if users can find it, content discovery is one of the most important criteria for raising engagement on a platform. The fact that users may search for long-form videos, photographs, text, links, social media communities, and other internet content in addition to short-form video content makes this discovery engine appealing.

The business also intends to capitalize on the new development of social interactions shifting to direct messaging. Since some of the most well-known messaging platforms are Instagram Direct, Facebook Messenger, and WhatsApp, the business has a chance to build momentum between content discovery and messaging, enhancing Reels and its messaging platforms. For instance, Reels is already being shared over Instagram direct messaging one billion times everyday.

These benefits are already yielding fruitful outcomes. Mark Zuckerberg, for instance, stated during Meta's third quarter 2022 earnings call that Reels had received 140 billion daily plays across Facebook and Instagram, a 50% increase from six months prior. What's more, according to management, Reels is now increasing its percentage over time spent on TikTok.

For those asking when Reels will stop being a financial drain, Zuckerberg stated during the same earnings call that Meta intends to push Reels' monetization closer to Feed and Stories over the course of the next 12 to 18 months, which should greatly increase Reels' income beyond TikTok.

What will Reels do next, then? It contributes to the growth of Meta's social media hegemony, thus a savvy individual would wager on this stock entering an upswing.