Facebook (Meta Platforms) and Netflix are two leading companies in different industries. Facebook is the leader in social media, while Netflix is the leader in the video streaming entertainment industry. But they share a common problem lately: They are running out of profitable opportunities as competition is closing in.

A couple of weeks ago, Netflix reported that its subscription growth is tapering off, the lowest since 2015. This week, Facebook announced its first-ever loss of users. Meanwhile, both companies offered disappointing guidance.

The tapering of the growth of the two companies is further reflected in a decline in the economic value added (economic profit) they generated in the last decade. Facebook’s economic value added has dropped from 64% in 2010 to 26%, according to GuruFocus.com estimates. Netflix’s economic value added dropped from 33% to 8%. A decline in economic value added is a sign that the competitive advantage of the two companies is eroding, and they become less effective in managing capital.

Nonetheless, investors paid little attention to this metric, following the momentum behind both companies, which made their shares top performers on Wall Street over the said period.

But that momentum is now in doubt following the news that growth is tapering off. Thus, the sell-off in the shares of the two companies on Wall Street, which spread across other technology leaders.

“The recent market response to earnings reports for both Meta and Netflix reinforces the fact that the stock market is forward-looking,” said Robert R. Johnson, professor of finance at the Heider College of Business at Creighton University. “The actual earnings reports weren't bad -- Netflix, in fact, exceeded analysts' expectations for fourth-quarter earnings by a wide margin and Meta's fourth-quarter earnings were only slightly below expectations -- yet both stocks got hammered following the earnings reports.”

Apparently, investors have been paying more attention to the future rather than the present to the guidance of the two companies lately.

“Netflix is only projecting 2.5 million subscriber additions in the first quarter, versus analysts' forecasts of 5.7 million,” added Johnson. “Meta is forecasting first-quarter revenue to be between $27 billion and $29 billion, where analysts had forecasted that number north of $30 billion.”

Johnson pointed to the fact that both companies benefited from the pandemic, which boosted user growth, thanks to shelter-in-place mandates.

“In essence, growth was accelerated and both firms recognize that while they anticipate growing in the future, that growth rate will be lower than recently experienced,” he explained. “The kinds of growth rates these firms have experienced simply can't continue into the foreseeable future. Investors are recognizing that and you will likely see earnings multiples on both stocks declining.”

Still, investors shouldn’t run away from the two stocks. Both companies continue to enjoy a dominant market position, which can help them monetize their advantage. For instance, Netflix is trying to make up for the slowdown in subscription growth by raising prices for its U.S. and Canadian subscribers. Depending on the plan, the hike sits anywhere between $1 to $2 per month. Facebook has been an early mover in the metaverse, the next big thing in the Internet space.

Meanwhile, the two companies generate plenty of cash flow, which will provide support for their shares, either in the form of a dividend payout or share buybacks.

Disclosure: Panos Mourdoukoutas owns shares of Facebook.

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