Facebook (FB) is broken.
As a stock, management team, product, and as a business model – it is broken.
This portends poorly for the company that Mark Zuckerberg built.
Funnily enough, Zuckerberg decided to opt for a new company name, "Meta," to signal to his investors that the company is barreling straight into a new chapter of its existence.
The problem I have with Meta is that they face 10 years of losses before they can potentially spin a profit from a Metaverse-based product.
Reading the tea leaves, the name change appears to mask the internal destruction of the legacy Facebook model, and the warning signs are more than a few.
They are in the digital ad business at a time when e-commerce company Amazon (AMZN) is rapidly encroaching on their turf.
I would argue that it was Facebook who completely missed out on e-commerce, almost like how Microsoft (MSFT) missed out on the cell phone business that Apple were able to figure out.
The final kick below the belt was Facebook admitting that Apple’s (AAPL) privacy changes have materially affected Facebook’s ability to collect large swaths of data.
The result is less accurate and voluminous data because they can’t steal as much reducing the amount they can charge digital advertisers for the data.
Facebook’s underperformance is the most complete anecdotal evidence so far on the impact to the advertising industry of Apple’s App Tracking Transparency feature, which minimizes targeting capabilities by limiting advertisers from accessing an iPhone user identifier.
Even with the terrible report, I don’t believe a 26% haircut in Meta shares was warranted, but this represents the sign of the times where companies aren’t given a free pass anymore.
If something like this were to happen in a period of easy money, I believe Meta would have only sold off 4%-6%.
So how about that Metaverse business?
Chief Executive Officer Mark Zuckerberg announced Wednesday that Meta had a net loss of $10 billion in 2021 attributable to its investment in the Meeetaverse.
I believe this is a risky stance to take considering it’s not fully guaranteed that the Metaverse will be what all the experts think it might turn into.
It could still only pull through in a diluted way like many things in life.
Amazon has really broken away from the pack, from an advertising minnow into an ad revenue juggernaut with annual sales of $31 billion for 2021, which is more than the $28.8 billion in ad revenue that YouTube posted for the year.
At that pace, Amazon’s ad business is also larger than several other entities in online advertising, including cloud rival Microsoft, whose CEO, Satya Nadella, disclosed last week the company’s 2021 advertising revenue exceeded $10 billion.
Amazon has also decided to increase the price of Prime by nearly 17% all while Facebook lacks pricing power to charge digital ad manufacturers more.
It’s time to retire the acronym starting with F – FANG, which once represented the equity market profile of Facebook, Apple, Netflix, and Google.
Is this the end of Facebook?
No, they still have a sterling balance sheet and are awfully profitable in what they do.
But looking forward, growth rates will contract down to single digits and user growth has turned negative.
These are both ominous signs with no solutions in sight.
Have we seen the high-water mark for Facebook?
Fixing its stock trajectory to the backs of the metaverse is a fool’s game because of the large losses it will incur in the short to mid-term.
Zuckerberg largely understands the Metaverse as an existential crisis of epic proportions, which is why he’s throwing the kitchen sink at it.
Broadly speaking, the stock market might have a Facebook problem because the company is so valuable and part of so many indices that a dip in shares will hurt the wider market.
In any case, the bombshell report means that this bodes poorly for the 3-year trajectory of Meta’s stock; and to give Meta the benefit of the doubt, at least they have the cash to make a legitimate run at the Metaverse business.
Don’t expect high octane price action in Meta until they signal that the Metaverse business is legitimate and just around the corner, which might be a while!
My recommendation is to put this one on the backburner until prospects brighten up.
