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Facebook’s move to the metaverse is ‘an optical illusion,’ analyst says

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Jefferies Sr. Analyst Brent Thill joins Yahoo Finance Live to discuss Meta COO Sheryl Sandberg stepping down, the road ahead for Meta, and the outlook for the metaverse.

Video Transcript

BRIAN SOZZI: All right. Meta is the hottest ticker on the Yahoo Finance platform. Our news of Sheryl Sandberg stepping down as CEO. Let's dive into what this departure means to Meta's outlook. Jefferies Analyst's Brent Thill joins us now. Brent, good to see you as always. So lots of different paths you could take here and perhaps one way to maybe look at if you're an investor in here, this company is now going to shift major focus and resources to the metaverse. Well, the problem is the metaverse is not making any money and it's really hard to define. How do you take it?

BRENT THILL: Yeah, look, the Sheryl news is obviously a blow given her commitment. But I think they have a clear leader who stepped in, has been there, and run multiple aspects of the business. So we don't feel uncomfortable about that. But definitely a blow to the story in the interim. I think from the metaverse perspective, I don't believe that's the case. I think there's an optical illusion that everyone's created that they're going after the metaverse when the reality is, the next call it next 3, plus years are going to be all ad driven. There's no real new substitute revenue stream that's going to come in.

So if you think about other stories, we talked about the analogy of Microsoft when they were the operating system company and they had to build Azure, which was their Cloud Infrastructure platform where the applications, companies go through pit stops. And we think this isn't a pit stop that they do need to look for another revenue engine, they need to diversify the story. But make no mistake, the majority of the revenue is going to come from advertising for a long, long, long time. And they happen to have the best targeting engine on the planet to find our interest, and go after us.

And that's why there's so many advertisers that want to be on the platform. Because they have, number one, the biggest reach on the Planet of the number of users. And number two, they have the most sophisticated targeting engine. All you have to do is pull up Instagram and type in a few things, and you'll instantly find how good it is. And so that's going to drive the story in the interim, yes, they're putting money in the next generation of the internet, yes, they're putting money into Oculus and can they make money on this, we'll see.

But I think that this concern and fear that they're going to blow all this cash because they're going after the metaverse is completely overdone in my opinion. Because at the end of the day, it's still an ad driven model. And we do think they're looking for a diversification engine. And they need to do more. And good for them to make the change, to get the company on the right course to find that. But I don't think that they're out of energy or speed or excitement from the advertising community.

Yeah, you've had some blows from the Apple privacy chains, yes, you've seen some macro headwinds on advertisers, and we're concerned about the overall advertising market with the snap negative pre what the Google Comp, the Facebook Comp, which are all difficult coming out of the pandemic. So we're going through that. And I think that's the biggest issue facing the global advertising industry, it's really just the macro slowdown not to move to the metaverse.

- Hey, Brent, if I could take a step back for just a hot second here. Considering the time period that Sheryl Sandberg was at Facebook, and for the era that they were this advertising behemoth, the operations that for many of the cases being looked at as the adult in the room, if you will, that she had to make sure that this company was growing up and growing up quickly, when you think about her era her time, how will she be remembered, considering everything from the growth of their revenue all the way to some of the Cambridge Analytica data scandals?

And even to, let's be quite frank, the representation that she brought in the form of a woman at the head of a major Silicon Valley company, and where the broader industry still needs to make strides?

BRENT THILL: I mean, there's no question she had a massive impact. I mean, you know I think ultimately, every company and every individual along the way, is going to have some down takes. And some of the things you mentioned were clearly not a direct reflection of her at a time. But I think ultimately, she's going to be remembered as someone that made a huge impact, and clearly for female executives helped led the way. And I think ultimately you're seeing this now a lot of the tech companies are still massively underrepresented in their top ranks with females. And obviously, the tech industry is trying to change that.

Look, I think ultimately the individual that's coming in to replace her has incredible experience running the company's international growth products, a number of initiatives. So they didn't just pluck someone off the street that just came out of college. I mean, you have an individual. Now that's been in the company well over a decade and run multiple initiatives, including building the entire international business out for them. So I think if you look at the issues separate, there's no question 8 below. And she has had a massive impact. And there will be a massive hole left by her departure.

But ultimately, I do think that this is one individual and they've got the talented bench, and they proved that they've got individuals that have been there for a long, long time that know the company, know multiple aspects of the business and can step in and lead. So I don't I don't believe that this is going to be a massive issue. I think you're seeing that in the stock the stock has not negatively reacted in a big way that many would think given her departure. But look, she put in an incredible amount of time, incredible experience and had a massive impact on the company.

So I think we'll see what ends up in terms of the next chapter. I'm sure she'll go on to do phenomenal things. But I don't believe, again, having covered tech for two decades, the quick reaction is when someone like this, of this caliber leaves that something's massively wrong. I don't necessarily-- I'm not drawing drawing that. I'm drawing the line of, hey, this looks more like Adobe Microsoft, other great tech companies that merely take a pit stop and are changing the tires and washing the windshield, they're going to get back on the road.

How long it takes to get them back on the road is again, the macro is coming in. The first thing that companies cut in a downturn is the macro, is advertising.

BRENT THILL: Brian, you brought up a good point on terms of female leadership, now out of all the tech companies you cover, is there someone or a group of leaders that might take that leadership baton away from Sheryl Sandberg that they could step up here and drive a lot of the key messages that she has been driving?

BRIAN SOZZI: Absolutely. So there's two software CEOs and software named Amy. Amy Hood and Amy Weaver. Amy Hood at Microsoft. I've worked with Amy Hood for well over a decade, and I have incredible respect. She is, in my opinion, the single most important female exec out there right now in tech. And I'd say obviously, close number two would be Amy Weaver at salesforce.com. Not a traditional CFO, but came through the legal community. And again, everyone inside salesforce.com knows that when Amy snaps, her fingers she can hurt cats from Minnesota New Jersey and Florida into a room in California in two seconds.

She commands incredible respect and is an incredible leader. So I'd say right now those are the two that come to mind. There are others, and apologize for leaving the others out. But I'd say those are the two that really come to mind the top of my list.

- Just quickly, pivoting back to Meta as we know that the ticker symbol is going to change soon, how quickly does the revenue model also change now that you have some of the executive, not just shake up but more so the executive change over here and the reprioritisation of where that revenue is being driven that is clearly in line here at Facebook?

BRIAN SOZZI: It's a glacial change. As I said earlier, the advertising model is going to be here for a long time. So if anyone's looking for a massive inflection or the metaverse, and all these creatures roaming in this new world, and in goggles, and whatever else you want to call it. It's going to take forever. So it's really an ad driven model. And I think what they're trying to do, again, is what Microsoft, Adobe, other great tech companies did, was find another revenue engine beyond just the core. Oracle did this way back when. They were a database company and then they moved into applications.

Microsoft was the operating system company, and then went into Cloud Infrastructure with Azure. They went into gaming. They went into other areas to diversify. So it took those companies years, if not decades, to build some of these new businesses. Adobe with the Experience Cloud. They were the Creative Cloud, then they acquired their way into the Experience Cloud, which is one of the three main clouds they have. So again, the analogy is it's going to take a long time.

They can do it. We believe that. Again, they have the user base. Yes, TikTok is a threat for the younger audience, and my kids are not on Facebook, they're on TikTok. Yes, Snap is a threat. There are other gaming stories where you may end up going to the metaverse in other ways through other platforms than Facebook going forward. So there's clearly a lot of risks ahead. But again, I think when you think about the company and what they've done even with reels, they were way behind in what was happening with TikTok. And I think there's signs that they're starting to catch up and show more progress in a product like reels.

So never count them out. And ultimately, I think, again, this is going to take a long time to figure out the revenue source from the metaverse. Yeah, they're plowing billions of dollars into it. But I think it's the right call because they need to make the move and try to diversify. And so that's the risk. This diversification move may not pay off. I think it will, but it's going to take time to actually show that. And the market doesn't like uncertainty. And so a lot of investors are sitting out saying, well, I'll wait to see the signs of the metaverse.

But again, I don't think you need to look at that. I mean, can you look at the advertising business? And that that's the single biggest driver.

BRIAN SOZZI: Brent, before we let you go, I caught a good note from you where you were crunching the numbers on the dating stock, so Match, Bumble, are companies like that recession proof?

BRENT THILL: There's no recession in love. You need shelter, food, and love. And I think in times like this, you kind of realize like the consumer's been going so hot and heavy with buying second homes, and you look at what's going on. At the core, you need the community around you. You need friends, and your family, and you need love. And I think that we've said this, that our headquarters in New York there's a restaurant across the street. There's a Margarita called the Mother of Dragons that's $30 for one Margarita. The cost of a dating app is 15 to $30 a month.

So I look at that and I'm like, OK, it's incredible the value that daters get for what they pay. And again, I'm a 20-year-old married guy with three kids, so I'm not I'm not using this apps full disclosure. But I talk to my friends that are single and other colleagues that are single that use it, and I think there's incredible value in what these companies have. I think they have incredible pricing power. I think they will be more recession-proof. Because you go back to the core, are you going to take the expensive trip to Asia or are you going to spend 15 to 20 bucks to ensure the basics things that you need when things are tough?

So no one's immune attack. That's for sure from the macro heads, the storms that are coming in on the macro side. But I think that Bumble with their female first app and they can diversify to this incredible $30 trillion of spend for females. And that's a really big opportunity, and I really believe in what Whitney the CEO is doing, and her vision long term. It's not happening short-term, but they can unlock this female spending power.

And then look at Match. Global brand from 18 years old to over 50 for the old fogies, can date. They have an app for every lifestyle. They have an app for every geographic region. In Japan, in Europe, the US. They're incredibly well diversified. And a new leader coming in at match from Zynga, so we'll see what he can do. But we like both stories and we think again, they're more recession-proof than others. But again, no one's immune. But we like both those names right here.

BRIAN SOZZI: Well, Brent, we here at Yahoo Finance, we love you, we love your analysis. Sending you a digital hug through the metaverse right now. Jefferies Analyst, Brent Thill. Always good to see you.