Insights from Mark Clubb at TEAM on Facebook, now known as Meta, and why TEAM won’t be buying Meta shares.
“A small Jean Genie snuck off to the city
Strung out on lasers and slash back plazas
And ate all your razors while pullin’ the waiters
Talking bout Monroe and walkin’ on snow white
New York’s a go-go and everything tastes right
Poor little Greene
Hoo, ooo, ooo
Give up now
Sits like a man but smiles like a reptileDavid Bowie
She love him, she love him but just for a short while
So, scratch in the sand, won’t let go his hand
He says he’s a beautician and sells you nutrition
Keeps all your dead hair for making up underwear
Poor little Greene
Hoo, ooo, ooo”
A number of my clients have asked me if we own Meta (Facebook) shares.
Then they ask, are you going to buy any shares?
Answer: No, unlikely.
Why the questions first.
Answer: The well-publicized share price fall. They are down 35% year to date.
Why the fall?
In the short term it was because Meta Platforms’ fourth-quarter 2021 earnings missed estimates and reported earnings down 5.4% year on year.
Meta also stated that Apple’s iOS changes negatively impacted businesses, particularly small businesses that rely on digital advertising to grow.
The company remains financially strong, with cash and cash equivalents of $48 billion. Meta generated free cash flow of $12.56 billion compared with $9.55 billion reported in the previous quarter.
So, is Facebook, aka Meta, dead?
Proclamations of “the end of Facebook” have been recycled at least a dozen times over the last fifteen or so years – basically since the genesis of Facebook began. In the past these stories have been proven wrong.
Let’s not forget that in the recent earnings report, the company stated it still expects to generate between $27 billion and $29 billion of revenues in the first quarter of 2022 alone.
However, I think the game may be up. I think the game was probably up around five years ago when I gave up my personal Facebook account.
Initially, I had joined Facebook (FB) to keep an eye on my then-young teenage sons. Naively, they agreed to be “friends” on Facebook, allowing me to view what they were up to. But that didn’t last long as they moved on to other “means” and left FB behind. They are now both in their twenties and their FB accounts are covered in cobwebs.
Who uses Facebook anymore? We all used to have a Facebook profile, perhaps because of similar reasons to my own, but also because it was a form of “internet ID”.
Facebook is not something most of us use anymore for entertainment, or information, or anything other than possibly social reasons.
Yes, Facebook owns Instagram, but Instagram is losing some of its appeal to trendier visual apps like Snapchat and TikTok.
Messenger and WhatsApp are great. But they’re messaging platforms, and messaging platforms are difficult to monetize unless you charge for them… and the moment Messenger and WhatsApp aren’t free is the moment they may not be popular anymore.
Facebook will remain a digital advertising empire for now, and there could be more upside ahead for a while longer, but it doesn’t have the consumer clout an Amazon or Google Search has.
For me, Facebook is dying.
There is an old stock market rule suggesting caution when a company changes its name. Particularly if that name has strong recognition.
Facebook changed to Meta in October last year. The share price has consistently fallen since.
The name change reflects founder Mark Zuckerberg’s own view on Facebook. Facebook is just a product. But it is a product past its “sell by date”. It will never again be what it once was in terms of usage and brand.
Another way to look at the problem is this. The well may be dry. There are only so many people in the world that can use FB. Maybe FB has simply run out of people to sign up and that new would-be FB users who were born in the past decade or so have no interest in using their parents or grandparents’ social network. Much like my kids.
Snapchat is currently better positioned. It too will eventually suffer this fate. Even ultra-hot TikTok will eventually fade. Everything fades.
Facebook knew this day would come, that’s why they bought Instagram and WhatsApp. Without those, Facebook would be in a far more precarious spot right now, without question. But even they just prolong the inevitable. They too will fade.
The result of all this is the company has a new strategy which is well summed up by its new name, “Meta Platforms Inc”. To me that is an explicit acknowledgement that FB is over. It’s not dead but dying, and while it dies it will continue to generate good profits, profits needed to finance the “next big thing”, the “metaverse”.
The Meta share price could well recover or bounce back and possibly appreciate. After all, as I have explained, things such as cash and revenue are not so bad. But I also think things are more dire longer-term unless you fully buy into the metaverse vision and the company is “betting” everything on the metaverse.
I think it’s too early to do that while at the same time, I know it can be dangerous to bet against someone like Zuckerberg who remains motivated and in control. But it is a question of time horizons, and the company is not alone in attempting to seize this new technology space. In fact, you could reasonably argue many are years ahead of them.
It is the time horizon and uncertainty of success that the stock market is concerned about, ultimately. My view is that the drastic transition that the company is looking to execute would be more effectively attempted away from the public markets as a private company.
Perhaps the company could spin off Facebook, keeping that division or business public, but take the rest of the divisions, including the metaverse initiatives, private.
To me Meta is a speculation and not an investment. Too much uncertainty for almost any price.
It “sits like a man but smiles like a reptile”
“a beautician and sells you nutrition.”
What if you own them?
I would apply the KonMari method. Marie Kondo is a bizarrely successful “decluttering” guru, who has made millions of dollars by devising and popularizing a common-sense method for getting your home in order and ridding it of unnecessary and unwanted “stuff.”
The method centers on an explicit commitment to tidying up and features one essential question: do the items you wish to keep “spark joy”?
Those items that do spark joy should remain; those that don’t should be got rid of.
As investors, we can also adopt some of Kondo’s cleanup tactics.
We all hate it. We have done since childhood. That is cleaning or tidying our room. As investors often we don’t like “tidying up” our portfolios because it requires that explicit commitment to do so. The exercise requires honest, dispassionate analysis and the results can be painful, particularly when crystalizing losses. We all hate being proven wrong. So, we need to a version of Marie’s question, “Does this item spark joy?”
Does owning Meta shares spark joy?
I leave you to answer that question.
Investment is much more about what you see and hear rather than just the numbers.
“Not everything that can be counted counts and not everything that counts can be counted.” (attributed to Albert Einstein).
Mark Clubb, TEAM