Meta platforms (NASDAQ: META) reported large-scale layoffs on the morning of Wednesday, November 09, affecting around 10% of the company’s approximately 90,000 employees. That’s on the back of the company’s valuation which has fallen around 75% in just over a year, from a seemingly unassailable position as recently as September 2021.
Undeniably, while economic concerns and Apple’s privacy changes have affected the company, the main cause of this share price drop is Meta Platform’s focus on the metaverse. Mark Zuckerberg himself admitted it.
Voting shares and history
Meta Platforms’ problem is that Mark Zuckerberg’s hand cannot be forced. He holds nearly 55% of the voting rights despite owning 13% of the company’s outstanding shares. Despite an alleged fiduciary duty of CEOs, it is extremely difficult to prove that a CEO is not acting in the interests of shareholders. In the meantime, Meta Platforms continues to spend.
The company’s operating loss from the metaverse is expected to be around $13 billion in 2022. The company said it expects that to increase significantly in 2023. For a company with around 40 billion dollars in annual operating income is huge. The company’s continued hiring of AR/VR employees underscores that the recent layoffs aren’t aimed at stemming specific losses in the metaverse business.
The company’s expenses are expected to rise significantly from approximately $86 billion in 2022 to $98-99 billion in 2023. The company’s forecast for Realty Labs’ operating losses to increase significantly by a year-over-year imply nearly $20 billion in likely operating losses for 2023. Due to Mark Zuckerberg’s craze and voting stock ownership, shareholders can’t stop it.
The metaverse is a fictional dream
The company’s problem is that the metaverse doesn’t exist in any real form. Even optimistic predictions about Metaverse adoption, such as that the majority of the population will use it one way or another, have 2030 as the earliest date. It should be noted that for a number of other game-changing technologies, such as autonomous driving, adoption has historically been slower than expected.
Our view has always been that fully autonomous driving would not be a game-changer for a company’s finances until it completely replaced the need to use a steering wheel. So far this has proven to be correct. Our view is the same for the metaverse where until it becomes a place, technologically, where people can emulate real life, it’s not going to be a game changer.
So far, there is no indication that this is happening. The company’s operating loss continues to mount as it works to create a technological marvel, but so far the company has given no indication of turning that into profit. The company has announced that it will expand significantly through 2023.
While it’s clear that the company dominates in this emerging market, with its Oculus headset, the company is spending a substantial amount of money to develop the metaverse. So what’s fictional here besides your legs in the metaverse? A clearly defined game plan to get closer to achieving Mark Zuckerberg’s dream.
Core Platform Results
Meta’s financial performance is driven by the continued strength of its core platform.
Meta Core Platform – Introducing Meta Investors
Facebook’s monthly active users in the last quarter were nearly 3 billion users, accounting for nearly half of the global position. As the chart above clearly shows, the company’s properties remain strong with consistent annual growth of 5% for each of the past 2 years. Facebook itself remains the primary platform for users to generate substantial user activity.
This growth has been seen in both incredibly profitable markets such as the United States and Canada, as well as faster growing markets such as Asia-Pacific and the rest of the world.
This continued growth in the number of active users is seen across all of the company’s platforms. Some like Instagram grow much faster. This continued strength along with reasonable financial statements (discussed below) show how, in a normal environment, the company could generate substantial returns for shareholders.
The company’s finances remain strong, but the impact of the Metaverse on the business is clear.
Meta Financials – Introducing Meta Investors
Meta Platforms made another mistake by spending $10 billion in buybacks at a much higher price per share, before it started losing massive amounts. The company’s total revenue in the last quarter was $27.7 billion, a 5% year-over-year increase. However, looking at the 4th quarter, the company’s revenue in 2022 will likely be higher than 2020 but lower than 2021.
The company’s reality labs aren’t significantly changing its revenue, nor are other revenues, but what remains incredibly strong for the company is its ad revenue performance. Unfortunately, what hurts the business is what happens with that revenue. Costs are rising, driving down operating profit even before Reality Labs’ mounting losses show up.
The company is still profitable, that’s clear. But its operating margin fell from the mid-40s to 20%. Current operating income still gives the company a P/E of around 15 indicating how profitable it is, however, forecasts call for a further decline in earnings. We’d like the company to drastically cut expenses associated with Reality Labs and focus on stock buybacks.
Our point of view
The answer here is clear.
Regardless of Reality Labs’ long-term potential, there’s a problem when the CEO (Mark Zuckerberg) owns 55% of the voting stock with a much smaller percentage of the stock. There’s especially a problem when this CEO is costing the company $15 billion in annualized losses by forcing investments into the metaverse, a number he predicts will increase dramatically next year.
That’s for a company that barely makes $2 billion in annualized revenue. It could be expandable, but in the last 2 years it has lost over $20 billion with no increase in revenue. Active users of the metaverse make up about 40% of the company’s target, and the company hasn’t provided a pathway to reverse this struggle to increase revenue and profit.
It’s time for Mark Zuckerberg to have voting shares commensurate with his ownership and let shareholders and other employees focus on investing for expansion. Until that changes, or its strategy changes, the company we once thought had enormous potential is nearly untouchable.
The biggest risk to the thesis is that Meta can always rearrange its business. The company can still significantly scale down its Realty Labs business as well as its capital investments, significantly improving earnings and shareholder returns. This could mean that investors who are not taking advantage of the current valuation would be absent.
In a normal environment, it is a $300 billion business, with an annual operating profit of $50 billion.
Meta Platforms has a unique portfolio of assets and despite the impacts of privacy changes etc. the business has been able to bounce back impressively. Advertising revenue numbers in particular actually remain higher than Realty Labs, for example, where the company spends $10 billion.
Going forward, we expect meta-platforms to be able to increase shareholder rewards, but Mark Zuckerberg needs to back up his VR/AR thesis and focus on core platforms. We would like to see its voting percentage reduced to be commensurate with its market share. Until that happens or he drastically shifts his focus to focus on long-term returns, we expect meta platforms to struggle as an investment.
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