Hello Coffeedrinkers,
I recently got an email: You like things that are cheap, misunderstood by the market and have good cash flows - why don't you buy Meta?
Here is my opinion.
Facebook killed its moat
Facebook (as the Metaverse doesn't make a lot of revenue for them, I'll refer to them as Facebook) has changed. When it became ubiquitous, the reason was to keep up with friends. You wanted to know what you missed, so you got on it, and spent time there.
As other social networks got traction and the novelty wear off, Facebook started to prioritize engagement.
This worked tremendously at first. Time spend on Facebook and Instagram went up, but slowly Facebook changed. Due to them prioritizing engagement, posts from friends disappeared from timelines, so people created less and less. Newsletter, memes and influencers took over. Slowly the moat that Facebook has built with it's network effect disappeared and they became just another content serving platform next to TikTok or Youtube Shorts. Facebook and Instagram isn't unique anymore. It is much easier to exchange one platform for another, when the personal connection is missing.
Facebook vs the world
Facebook not only faces a declining networking moat, it also needs to fend of dangers from antitrust regulations and competitors. Facebook doesn't own its own platform. With increased privacy rules and Apple and Google shift ad revenue and data away from Facebook. That in turn makes them less attractive to advertisers and thus reducing growth.
Additionally governments are taking up the fight with them. Antitrust lawsuits and the constant vigilance of law makers made it impossible for Facebook to buy new companies. Instagram and WhatsApp where acquisitions and those ground to a halt in 2016.
Furthermore, scandals like the Cambridge Analytica one have damaged their reputation. That damage might not be visible at first, as the network still grew, but I think it will show - as people lost trust.
As we experience inflation the advertisement budget of companies might decrease as well. A 20% cut in ad budgets would be quite damaging to Facebook's cash flows. In the end, Meta is 100% ads.
Failed acquisitions, shareholder returns and the metaverse
In 2014 Facebook bought WhatsApp for a whopping 19 billion. Paying up for Instagram proved to be the correct decision, but after 8 years - the WhatsApp acquisition can only be seen as a failure. While it has many users, it is unclear how Facebook will ever monetize them or if they even can. How sticky is that user base really, given that there are dozens of alternatives now? What will stop them from flocking to the next free messaging platform?
Instead of acquisitions the new bet is on the metaverse. A virtual reality that will be used in meetings and with friends according to Zuckerberg. The company spends $10b yearly on that bet, and that does not include the opportunity costs that comes with not prioritizing other projects (like the monetization of WhatsApp).
Wearing the current generation of virtual reality headsets is cumbersome. They might reduce the friction of the initial costs and wear ability, but the question remains why would anyone use it? Are the costs worth it for companies to use it over normal video chat?
Virtual Reality Gaming is a niche market, and while porn will help with sales, I doubt that they will be enough to move the needle for a $411b company.
The next question is also shareholder returns. The company repurchased billions of shares in 2021, conveniently just as Zuckerberg sold. Shares outstanding are basically flat tho, as the buyback speed has slowed significantly in the last quarter, despite the shares being much cheaper. Given that the company pays no dividend, how will shareholders be rewarded here?
But the upside?
Facebook of course has huge potential. The monetization of WhatsApp, being more competitive with TikTok and even the Metaverse might be a smashing success in the future. The problem is the downside. The company killed its moat. Sure the company might trade at double the price from here, but it can also trade at half. Many ad companies trade at around 8 PE. Given the lack of growth and shareholder destruction, why shouldn't Facebook?
Given all those factors, Meta/Facebook is a risky bet. It is too big to provide the upside that smaller companies provide, but too variable to have lots of downside protection. I'll pass.
This is why I got out of FB/Meta a while ago. I first got on FB in 2009. It connected me to people I hadn't seen in 20+ years. I found my army buds and childhood friends. It was awesome. I used it multiple times a day for hours on end. Then around 2015 I found out that a lot of people I thought were friends as well as family members were actually awful people. Then Cambridge Analytic and algorithms. It became a toxic place and I stopped using it unless I got a notification. I went from close to 1000 friends to less than 80. I use the messenger more than anything. Tried Whatsapp but didn't provide value above preinstalled msg apps already on my phone. Instagram is ok but not great for interacting like FB. I bought Oculus and it was awesome for about a week. And as author said, there is nothing they have that can't be done elsewhere. I won't buy that stock again.
Great summary and I share the same thoughts. Facebook is not financially run for shareholders but for Zucks pet projects. And that can be fine for some shareholders with great amounts of trust to Zuck, it's not for more conservative shareholders.