10/31/2022: A Meta Analysis on Meta
Meta needs to generate $200B+ of profits on metaverse during 2030-2039 to make it worth it
META 0.00 stock crashed 25% this past week. Q3 revenue actually beat expectation but the metaverse bet incurred $3.7B of loss in Q3, or ~$15B annualized. Furthermore, Zuck said the metaverse loss will further accelerate in 2023 but they will eventually become profitable in 2030s. Investors are frustrated with this level of spending. But since Meta is a corporate dictatorship, there’s nothing investors could do except for bailing on the stock and that’s exactly what they did. Meta is now trading below $100, a level we haven’t seen since 2016.
Could Meta’s metaverse ever work? This is a hot topic among my ex-FB friends this past week. I worked at Facebook from 2006 to 2011 as one of the founding engineers of Facebook Ads. I had a blast there and made many life-long friends. But this pivot to metaverse got people confused and my former co-workers are quite divided on this pivot. Some people think Zuck has taken the company through multiple crises and he could make this work. Some people think the premature all-in bet without mass consumer adoption is extremely risky and unlikely to work.
I personally think investing in the metaverse is fine. It’s a matter of ROI. I created a spreadsheet to see what it takes to make the metaverse bet a success. As illustrated above, with the current spending plan, Meta’s metaverse will have to generate ~$20B of profits for 10+ years to make the IRR 9%, which is not a very high return. $20B is a lot. To give some context, Disney, Nintendo, Activision Blizzard, Electronic Arts and Take Two generate ~$20B of annual EBITA combined. With Meta’s current spending plan, a moderately successful metaverse investment has an extremely high bar to clear. SPY 0.00’s long term return is slightly higher than 9%. In other words, instead of spending close to $100B of money on metaverse, if Meta put the money into an index fund, it’s very likely the index fund approach will beat metaverse in turns of investment returns. Sure, the tens of billions plowing into VR/AR could advance humanity in addition to investment returns. But that’s not what most retail investors are looking for. We are also assuming Meta’s metaverse investment turns out to be a huge success here. What if it doesn’t?
I believe two things triggered investors’ harsh reactions. First, the level of spending is too aggressive. It’s hard to make sense of it if we try to model it financially. Second, although Zuck has voting control, the money he is spending doesn’t belong to him. It belongs to all the shareholders. But he shows no regard for the shareholders and the board is not pushing back on him. The only thing investors can do is to run away from the stock. I do not blame META 0.00 shareholders for running away. He even made Jim Cramer cry.
Someone asked me what I would do if I were in charge of Meta. First, I would not have let the Apple relationship slide so far down. When Apple asked for a share of Facebook’s ad revenue, I would have given that to them and figured out a plan to be less dependent in the long run. Apple privacy changes probably wouldn’t have been made if Facebook had paid up. Apple started advocating the privacy updates as a PR campaign. Google is paying Apple $15B in 2021 alone (almost 6% of their revenue) to be their default search engine. That's an insane amount of money borderline extortion but it’s a smart business decision. The alternative would have cost Google way more than $15B a year. In the meantime, Google is building out Android, Chrome and bought the phone division of HTC to rival Apple. Look, Apple and Google are direct competitors on smart phones but they figure out a way to work together. But here we are. Facebook got itself into a really bad situation by ignoring Apple. If I were in charge today, my top priority would be to mend relationships with Apple by paying them some money in exchange for much better ad signals and a less prominent “Ask App Not To Track” button. I am sure the ransom paid to Apple will have a very positive ROI.
In the meantime, I will keep investing in metaverse but instead of losing $10B a year, I will lose up to a couple of billions a year or less based on consumer adoption. Hardware+OS+Ecosystem takes a long time and many iterations to mature. Since I just bought time from Apple, I can afford to be patient. There are many other things I want to do but if I were in charge, mending relationships with Apple and cutting investments on metaverse will be my top two priorities.