How Meta Became the Market's Biggest Value Trap
You would be hard-pressed to find a more contentious stock than Meta Platforms Inc. (NASDAQ:META) in the value investing world right now. Facebooks parent company used to be one of the most popular stocks in the world, riding the wave of its social media dominance and raking in cash from advertisers. Yet on Thursday, its stock plunged nearly 24%, the latest in a string of dramatic declines following disappointing earnings and guidance, bringing the price to levels not seen since 2016.
Metas disappointing performance cannot be pinned on any one single factor. There are several things that contributed to its downfall. While some bulls may claim these issues are mostly external, that could not be further from the truth. Lets take a look at how Meta turned itself into the markets biggest value trap, and why investors should not be lured in by how cheap its stock looks on paper.
Declining userbase
The attention of users is the bread and butter of Metas legacy social media sites such as Facebook and Instagram. The more users there are and the more time they spend on the platform, the more money these sites can make from said users through a combination of advertising revenue and harvesting their information to sell.
In the third quarter of 2021, Facebook shocked the investing world by reporting its first-ever user decline. Since then, daily active users have grown at an anemic rate. The effects of global expansion have been mitigated by lower adoption among younger generations, who are more attracted to TikTok.
To be fair, the popularity of Metas social media sites among younger users is not entirely its fault. Young people often want to distance themselves from things they consider to be for older people, and who wants their parents seeing them in posts from their college friends? All social media is destined to become uncool someday - it will probably even happen to TikTok in the future.
However, not all of Facebooks user troubles can be laid at the feet of market trends and competitors like TikTok. When Apple Inc. (NASDAQ:AAPL) introduced app-tracking transparency with its 14.5 iOS update, the true extent of how much information Meta mines from users was revealed, and users were understandably upset.
The battle with Apple
Apples app-tracking transparency update might be the point when Meta CEO Mark Zuckerberg truly began to see Apple as an enemy.
The feature requires iPhone users to give explicit consent for user-level and device ID-based monitoring by apps. This means that if users refuse the popup asking if they will share their data with an app, the app cannot harvest certain protected data.
When the extent of Facebooks data mining was revealed, not only did it spook off some users entirely, it also caused others to refuse to share their data, causing a dent in the company's advertising revenue as it had reduced ability to serve targeted ads which relied on the mined data.
Meta decided the perfect solution to this problem would be to engineer a way to bypass Apples privacy rules to resume snooping on users without their knowledge or consent.
In a proposed class-action lawsuit against Meta filed in September, two Facebook users accused the platform of circumventing Apples privacy rules to collect their data. Another similar complaint was soon filed, both based a report from researcher Felix Krause claiming that Metas Facebook and Instagram apps for iOS inject JavaScript code onto websites visited by users, which allows them to intercept, monitor and record its users interactions and communications with third parties.
The workaround is fairly simple, so it seems possible that Facebooks plan from the very beginning was to take this matter to court. Perhaps the company believes its workaround is completely legal, or perhaps it hopes to force a change in Apples privacy policies. I am leaning more toward believing it is trying to force a change in policy; after all, in 2021, Facebook tried to bring an antitrust lawsuit against Apple claiming that it abused its power with its privacy rules.
If Meta could easily win a lawsuit against Apple and mine user data freely again, thereby recovering its revenue, then perhaps this route would be worth it. However, as time drags on with the battle yielding no results, this head-to-head with Apple seems like a massive waste of time and resources that could be better spent elsewhere.
The kryptonite of arrogance
Metas belief that it can force Apples hand in a way that angers its user base without suffering any repercussions whatsoever can be summed up with one word: arrogance.
Arrogance is often compared to kryptonite for leaders because it can impair their judgement and blind them to the reality of a situation. In the business world, this is incredibly dangerous because it can cause top executives to misjudge market trends, overestimate their abilities or embark on inadvisable business ventures.
An even greater example of Metas arrogance can be found in the fact it was recently fined $24.7 million for repeatedly and intentionally violating political campaign disclosure laws in the U.S. It is estimated that this could be the biggest campaign-related finance penalty in U.S. history.
According to the Fair Campaign Practices Act passed in 1972 and later strengthened by the legislature, ad sellers must keep and make public the names and addresses of political ad buyers, the target of their ads, how the ads were paid for as well as the total number of views of each ad.
This laws intention is to reduce the amount of fraudulent political ads going around. It provides a measure of accountability for political ad buyers by making it difficult for them to impersonate their political rivals to spread misinformation.
Meta has tried to challenge this law in court before, claiming that it unduly burdens political speech (by lessening politicians ability to spread misinformation) and is virtually impossible to fully comply with (television stations and newspapers have complied with the law for decades, so unless Meta just does not have the money to hire any sort of moderators to ensure ad content does not break the law, there should not be any issues).
The biggest danger of this arrogant outlook is not increased regulation or an unfavorable operating environment - it is the fact that it has repeatedly resulted in Meta banging its head against walls up to and including the U.S. government rather than doing something productive instead.
Into the metaverse
With Metas legacy business in a slow decline, the company formerly known as Facebook decided to rebrand itself as a metaverse company.
There was a lot of hype surrounding the metaverse in early 2022, driven in part by Facebooks rebranding to Meta as well as the bull markets for cryptocurrencies and non-fungible tokens promising a virtual economy built on the blockchain.
Meta is investing heavily with the goal of becoming the dominant company in the Metaverse, a 3-D version of the internet. Zuckerberg believes that by providing the go-to platform through which users experience the metaverse, Meta will be able to create its own terms for serving ads as well as harvesting and selling user data without interference from companies like Apple. In fact, the goal is to become the Apple of the Metaverse.
However, the majority of investors are not sold on the idea, which has been a big contributor to Metas steep share price declines. Using the declining profits from its advertising business to fund undisciplined spending on its Reality Labs segment has in some ways transformed Meta into a tech startup from the markets perspective, rather than the money minter it used to be.
Until the day comes when all of this metaverse spending churns out a profitable business, which is not likely to happen anytime soon, I do not foresee the market reevaluating the stock. The bottom line is, Meta is a company in decline that is using its cash flow to build an unprofitable startup. It is still not clear whether enough people will adopt the metaverse to make this business venture profitable.
Even if the metaverse does take off, Metas creator friendliness is already shaping up to be downright hostile, which could make it difficult to catch up with the competition. Decentraland, for example, charges creators a flat fee of $2.16 to mint digital goods that can be sold over and over, plus a 2.5% fee for selling goods on its marketplace. Meanwhile, Meta charges a 30% platform fee for sales on Meta Quest, and Horizon Worlds will charge a 25% fee for goods and experiences sold in addition to the 30% platform fee.
Meta is counting on gaining iOS-like platform dominance so that it can charge such exorbitant fees. It has a long way to go to catch up, though, and it will be an expensive road. I cannot even see the bottom of this value trap.
This article first appeared on GuruFocus.
