The Case For Meta Platforms - A (Tentative) Buy
Meta is a hold for the immediate to medium term, and a buy for the very, very long term.
Note: This is a working draft. Many references need to be provided and the phrasing cleaned up. This piece is focused on mechanisms of future revenue. In doing so, I hope to identify the key points on which future performance rests. This will allow us to come to a tangible stance on Meta's stock.
Context
Overview and main businesses
Facebook, which renamed themselves Meta in October 2021, has two operating segments. They are called the ‘Family of Apps’ and ‘Reality Labs’. The Family of Apps earns almost all the revenue.[1]
Key social media platforms such as Facebook, Instagram, Messenger, and WhatsApp make up the Family of Apps segment. Meta Quest, formerly called Oculus, sits within the VR Reality Labs segment.
Competitors and source of revenue
Advertising sales make up most of Meta’s revenue. Which means ad space on their apps are sold to markers.[2] In turn, the user base of these apps are what support Meta’s cash flows. As we trace the attention of users, we can begin to predict the company's future.
Key competitors include Alphabet’s Youtube, Tencent’s TikTok, and Twitter. Yet these are only the direct competitors. One can imagine non-digital alternatives. Examples include real-life tourism or any number of hobbies - perhaps fuelled by a general backlash against social media.
Point of recent interest
Most recently, Meta’s shares fell by 26.4% on Feb 3. This destroyed US$200bn of its market value. The trigger was first a lower than expected forecast in revenue for the first-quarter results of 2022. Analysts expected just over US$30bn against Meta’s forecast of US$27-29bn.
Second, Facebook lost daily active users for the first time. From Q3 to Q4, the platform lost 500,000 daily users to 1.93bn users.
Third, Apple forced apps to obtain permission from iPhone users before targeted advertisements could be served. As more users choose not to be tracked, so will advertising revenue fall for Meta.
Key mechanisms and trends
User attention
Demographic trends are critical. As ad revenue is directly linked to user attention, the size of the user-base has a direct and immediate impact on revenues for the firm. Not only that, but since valuations (e.g of the stock price) are forward looking, a drop in current user numbers correspond to a disproportionate fall in future projected earnings (and so a fall in the current price).
On that front, it’s open knowledge that Facebook has long fallen out of favour among the youth. Yet many still seem to use Instagram and so attention has been kept within the family.
What is more pressing is TikTok. More than 1bn people use TikTok per month, compared to Meta’s 3.6bn.[3] Despite strategic concerns (see: Donald Trump’s attempt to ban it) TikTok has persevered.
Whether a downward trend in the user base will begin, is hard to tell for certain. But I do think Meta will suffer in this aspect.
Intuitively, there are three contingent factors that each affect attention rates.
First, it is uncontroversial to say that Facebook is increasingly unpopular among the youth.[4]
Second, there is social media competition. While TikTok can eat away at young users, YouTube also offers long-form formats with greater depth. Reddit offers in-depth customised and close-knit communities.
Facebook has failed to properly moderate its digital content sphere. Compared to the plethora of options, Facebook looks bland and uninspired. It is not interesting enough to hold people’s attention. And if it does, there runs the risk of quick pollution and bad-faith actors (see: trolls) poisoning public spaces.
Of course, conversely this suggests that a possible way out is for Facebook to start moderating it’s spheres more rigorously. But this may be too little too late.
Third and last, social media of Facebook’s sort is increasingly unpopular. Movements against social media have increased as people’s understanding of unhealthy digital habits grow.
As one of the largest platforms, Facebook has now been the target and source of publicly acknowledged pain. People are realising that living their lives by comparing photoshopped images on Facebook may not be an ideal way to live. Self-help books and growing movements frequently mention the platform.
People then move away from the platform not because of some external motivation. But simply because the ‘badness’ of the platform has accumulated to such an extent that it outweighs it’s ‘positive’ addictiveness.
This is not to say all social media is bad and will see a withdrawal. Tying in with Facebook’s failure to sufficiently moderate it’s spaces, it might be that the digital spheres are maturing. Put simply, it may be that social media is adapting to properly reflecting real-life and serving as a parallel world. It facilitates and reflects real-life interactions, such as through documentation or enabling deep conversations, but it does not substitute for real life.
This is outside the scope of the article, but one can imagine that a failure of Facebook is allowing for artificial and superficial modes of communication. Perhaps the true-er form of social media will be those that instead work to imitate real life’s slowness and complexity. Long-form media and conversations, body language and facial realism rather than static statuses.
These factors lead me to conclude that if nothing changes there will be at first a slow decline in user attention, and then suddenly a total collapse as the network effect fails. While users may still hold accounts, active time may drop with these factors as driving forces. Personally, I would not be upset if Facebook were to become nothing more than a digital address book.[5]
External forces
Two things put external pressure on Meta. 3rd party platform restrictions, and interest rates.
Apple is one example. They have mandated that apps offer iOS users the choice to decide against data tracking. So who’s to say that other digital mediums won’t do the same? Android phones may come with functionality to nullify data tracking. While it may not be a mandate or even pre-loaded, it is just as easy to see privacy functionality being developed and distributed independent of manufacturers.
Similarly, browsers may be inclined to offer privacy support options that do the same. Google certainly looks set to the above with Android and Chrome.[6]
As of now (11 Feb 2022) there is also tension between the EU and Meta. Privacy claims may come to be strongly defended in Europe. With the proportion of active users in that base, Meta would be heavily hit.
Interest rates also concern many equities. Especially Facebook, since it is part of the FANG designation.
This is again outside of the scope of the article. Yet, when interest rates rise, money supply and liquidity will fall. Since covid and before has been full of quantitative easing[7], rising rates will severely cut into growth stocks that have been pumped up. This is all the more likely given the more permanent rates of inflation that have been recorded (as of 11 Feb 2022). If inflation is more permanent, and not transitory, the central bank will signal its intent to raise rates more aggressively. This will control inflation and reduce liquidity. There is some risk that it may be too aggressive and constrain real economic activity, or be too lenient and let inflation run rampant and destroy stability. Yet this discussion is best left for another piece.
A striking point related to emerging from covid trends, is that consumer-based software tech companies may see a drawdown. This is seen in the reaction against Netflix. Part of the backlash was motivated by a realisation that previously lofty growth rates made from covid-lockdown trends were unsustainable in a world emerging from such measures.[8] Facebook may see the same revision of growth rates built on unrealistic expectations.
These factors make it all but certain that Meta will face more challenges. The key question is if it will be more painful than anticipated. Since that is hard to tell, it is more productive to focus on Meta’s ability to sidestep and innovate out of these problems.
It will have to innovate out of privacy issues to sidestep regulations and 3rd party restrictions. All the while protecting the granularity and accuracy of data to offer marketers. This remains to be seen and places more emphasis on the success of the proposed Metaverse.
Pipeline developments
Against this backdrop of pessimistic factors, the Metaverse is hopeful. The question is how successful the metaverse will be, and if it can be created fast enough for meta to transition back to dominance (though it is not as if it is falling into obscurity).
Since we can’t predict how well the metaverse will be practically, we can examine it as a concept. So far, it has been fairly vague. It sounds like a retelling of second-life or something out of ready player one. A connected sphere to live out a digital life also sounds like what we already have in reality.
It is easy to imagine that distinct spheres or styles of the metaverse may emerge. In which case, commoditisation will not result in a transfer of monopoly over social media as Facebook currently has. In fact, right now the users on platforms are increasingly siloed (find reference). If this continues, the future might not be in re-creating social media, but in gathering the many types of platforms there are available according to people’s preferences.
Another neutral point is that the metaverse already exists in some form.[9] You can see this in the disparate online communities that focus on gaming, hobbies, or debate. While one can see the metaverse as a natural extension of the digital sphere, it is not apparent whether meta will succeed. In fact, it is not obvious that it will be winner takes all.
Conjecturally, a successful metaverse might be one that focuses on pure ideation. Imagining a truly utopic society, it would be one that does not distract but instead focuses on the purely substantive. This means real-life links, improvements in real-life research, and discussion or interactions grounded in the material. Philosophy and theories would be exchanged, but they would be real substantive ideas. Likewise with a hobby: there would be communication and discussions based on real-life techniques and trends that people execute on. Even if the ideas were purely virtual, they would still be grounded in the sensory, physical, perception of humans.
This suggests that idea ranking, collation, and sharing would have to be created. For example, the unifying platform of journal articles and thought sharing can be codified. That is one way in which a platform monopoly may be formed.
Substantive Stances
Meta is a hold for the immediate to medium term, and a buy for the very, very long term.
Despite all these negative points, they are already widely known. The stock has already fallen an incredible amount. The firm also has ample cash reserves to innovate and sustain itself.
The core business may be in slow decline – but even if it declines, it does not seem likely to blow up immediately. This means the firm has a good runway to operate with.
External factors are a real threat, but something that may yet be avoided. Competition and threats from privacy may be handled well enough. While Mr Zuckerberg may not leave the firm and remain as a negative aspect of PR[10], there is yet time for the firm to implement a better moderation team or implement healthier structures on the platform. Overall, these factors may be balanced out.
The metaverse is amorphous and an uncertain term. But while it is hard to bank on its success, it is also too early to bank on its failure. The concept is somewhat sound, and the implementation may be entirely possible. As the economist says, mockery is an 'unreliable guide to the future'.[11]
As a function of the markets, inflation and rising rates may yet hurt the firm. A recession or contraction in markets will also hurt them – perhaps even more so if there is a regime change into value from growth. Yet the fundamental outlook is not necessarily bleak, and these market forces are confined to the medium term (for now).
Thus, the recommendation is to hold and a buy for those that can afford to sit steady for the very long term.
[1] 97% for 4th quarter 2021; FB-12.31.2021 - Exhibit 99.1 (q4cdn.com)
[2] Explain the main mechanics of ad click rates etc
[3] Metamorphosis: Facebook and big-tech competition | The Economist
[4] Ms Haugen alleges that Facebook has concealed a decline in its young American users. She revealed internal projections that a drop in teenagers’ engagement could lead to an overall decline in American users of 45% within the next two years. Facebook is nearing a reputational point of no return | The Economist
[5] I admit my bias is bleeding through here
[6] How Apple’s privacy push cost Meta $10bn | The Economist
[7] Has the pandemic shown inflation to be a fiscal phenomenon? | The Economist
[8] Find a reference for this - but it exists
[9] Don’t mock the metaverse | The Economist
[10] Metamorphosis: Facebook and big-tech competition | The Economist