Bull vs. Bear is a new, weekly feature where the VettaFi writers’ room takes opposite sides for a debate on controversial stocks, strategies, or market ideas — with plenty of discussion of ETF ideas to play either angle. For this edition of Bull vs. Bear, Karrie Gordon and Elle Caruso debate the investment case for and against communications services giant Meta.
Karrie Gordon: Hi Elle, I’m excited to tackle my first Bull vs. Bear with you and have the chance to point out all the glaring issues with Meta, Facebook’s parent company. There are so many reasons why I have a dim outlook on the company, but at the very top of that list is an issue with so many of these sensational mega-companies: the founder. In this case, Mark Zuckerberg, who has extreme shareholder control of the company through his super-voting Class B shares, has been openly criticized for his lack of leadership skills and the failed metaverse pivot.
Meta is floundering, and even Cathie Wood doesn’t view the company as one driving any meaningful innovation these days; her flagship fund ARK Innovation ETF (ARKK) doesn’t contain Meta.
Elle Caruso: Hi Karrie! Really excited to jump into this topic with you. Let me stop you right there: One glaring issue in your argument is the idea that Meta is simply, “Facebook’s parent company.” While that’s technically true, it fails to encompass the rest of the company’s vast capabilities. Meta is a technology conglomerate comprising Instagram, WhatsApp, Oculus, Giphy (for now…), and Mapillary, among others, not just the Facebook-branded products.
I won’t even touch on Cathie Wood’s bets on disruptive innovators because the numbers speak for themselves. ARKK is down over 62% year to date as of November 4. The Global X Social Media ETF (SOCL) and the Invesco NASDAQ Internet ETF (PNQI) are two options for investors who want meaningful exposure to Meta (and both are outperforming ARKK year to date!)
In my opinion, CEO Mark Zuckerberg made a grave error with his 2021 announcement that the company would be renaming itself Meta and focusing on becoming a metaverse company. Only at the bottom of the memo was the real meat: details about reorganizing the company’s financials to separate its “Family of Apps” and “Reality Labs” businesses. The announcement completely confused everyone, led to skewed headlines, and diminished the legacy and significance of the company’s Family of Apps business. But Zuckerberg’s re-focus on the metaverse was not at the expense of the Family of Apps business; it was a venture bet for long-term growth and shareholder value.
The Family of Apps business has had challenges this year – as have all big tech companies – but its fundamentals are still strong. Investors are understandably spooked by the company’s reduced margins and excessive CapEx, due to investments in the Reality Labs segment. But what if we viewed Meta’s R&D spending as an asset, as we do in other industry sectors, such as biotech and pharmaceuticals? It might be capital-intensive but has the potential to lead to breakthroughs that drive profits and well-being for consumers.
I’ll admit Meta has had plenty of challenges, some self-inflicted, but there is an opportunity here for bold contrarians.
Gordon: Very bold contrarians, Elle. Meta is dragging the entire communications services sector down through its abysmal YTD performance. Meta stock dropped 24% two weeks ago on its Q3 earnings misses, following the trend from February’s poor earnings report when it dropped 21%, shedding over $250 billion in a single day.
Caruso: But look at the valuation now! Meta is trading at a price-to-earnings ratio of 8.5, as of November 3, which is 68% lower than its five-year average. The stock is trading at a price not seen since 2015, despite revenue being ten times higher. This is crazy.
And here’s why: Meta is still adding users. The company is up to 2.93 billion daily active users (DAUs), an increase of 50 million in Q3, and 3.71 billion monthly active users (MAUs), an increase of 60 million in Q3. (Thanks to Ben Thompson’s Stratechery for breaking this down.) They’re not just Instagram and WhatsApp users, either: Facebook itself increased its DAUs by 16 million (to 1.98 billion) and its MAUs by 24 million (to 2.96 billion) in Q3. In the case of Facebook, that growth was largely in Asia-Pacific; however, the U.S. and Europe were flat, not declining — which is notable, since Facebook completely saturated those two markets long ago.
What accounts for the growth? Reels, Meta’s TikTok-killer. Zuckerberg said during Meta’s Q3 earnings call that Reels, which allows users to create short-form videos, is played 50% more compared to six months ago, and its run rate is now $3 billion — compared to $1 billion, just one quarter prior! In contrast, competitor TikTok had $4 billion in revenue in 2021.
These are rock-solid fundamentals for the family of apps business.
Gordon: Which makes Zuckerberg’s single-minded pivot of the Reality Labs division to the metaverse that much more bizarre. It also highlights the dangers Meta’s shareholder structure poses to investors. Gone are the relative checks and balances that advocate for shareholder interest; Meta dances to one man’s singular vision, even if that failing vision drags the company down like a lead balloon.
So far, based on Zuckerberg’s vision, Meta has spent over $36 billion on building out a metaverse through its Reality Labs division that can’t create legs for its avatars, faces deeply entrenched issues of harassment inherent to the social media giant’s primary platform, and requires ridiculously expensive VR headsets to access.
Caruso: Yes, Meta has been spending money. R&D spend went from roughly 20% as a percentage of revenue in 1Q19 through 4Q21 to roughly 30–33% in the last two quarters, and the company expects to spend $34-$39 billion in capex next year.
But you incorrectly said, “Meta has spent over $36 billion on building out a metaverse through its Reality Labs division.” This is a common misconception. Meta’s increased R&D spend has little to do with the metaverse. The metaverse’s costs will exceed $10 billion this year (increasing even more next year), but that’s proportionally a small percentage of the company’s overall spending.
Instead, the R&D spending is focused on addressing the company’s primary threats: TikTok and Apple’s App Tracking Transparency feature (or ATT). The solution to both challenges is more artificial intelligence, a capital-intensive initiative.
CFO Dave Wehner said on Meta’s Q3 earnings call that the company’s investments in expanding its AI capacity is driving substantially all its CapEx growth in 2023. Integrating AI into more of Meta’s infrastructure requires more expensive servers and networking equipment, and the company is building new data centers specifically equipped to support next-gen hardware. Better hardware is going to give Meta a leg-up over its competitors. And since you mentioned ARKK earlier — ARK Invest wrote in a recent newsletter that if AR and VR become mainstream computing platforms, then the ROI could dwarf the $10-15 billion per year Meta is spending to secure leadership in the space.
For all of the Zuck’s cringe-worthy metaverse leanings, I just keep coming back to the fundamentals. Meta is growing its user base and deploying CapEx strategically to become even more impenetrable in the market than ever. Other tech companies wish they had such a strong position!
Gordon: Those are some great points, Elle, but I’d like to close by pointing out that the Facebook platform gaining users is also the same one still amplifying hate speech, so really, we all kind of lose on this one. Not as much, though, as the money Meta lost this year alone — The WSJ said it better than I could ever have: “There Has to Be a Better Way to Lose $800 Billion“.
And as usual, the ones to pay for a CEO’s poor management and terrible businesses choices are the employees, not the one individual single-handedly driving the company into the ground. The WSJ ran an article over the weekend that Meta would be laying off a large swathe of its workforce beginning this week, not entirely surprising given the unsustainable nature of hiring over 15,000 people just this year alone. The only place Zuckerberg is looking to truly expand right now is in the metaverse: tell me those hires weren’t for a failing venture that is now leading to mind-boggling monetary losses and massive layoffs.
Thanks so much for doing this with me, but there’s just no way I could ever believe in a bull case for Meta — after all, a bull has something that Meta’s metaverse still doesn’t: legs. I favor the approach taken by the Subversive Metaverse ETF (PUNK) that permanently shorts the company, for investing within this space.
Caruso: For all of Meta’s controversies over the past several years, its hold on society is deeper than ever, with its money-making potential huge and continuing to grow. Meta took this massive hit by choice, embarking on a project that few understand and appreciate, and I see an opportunity for bold contrarians to be rewarded. Even if you’re only buying in for the Family of Apps business and think the metaverse is garbage, the stock is trading with a P/E ratio that is too attractive to sit out.
It is unfortunate the company is resorting to layoffs in order to “focus [its]investments on a small number of high priority growth areas.” But the market is responding favorably to the news: Shares of Meta rose 4.7% by mid-day trading on Monday!
Plus, Jim Cramer appeared to cry during last Thursday’s broadcast of CNBC’s “Squawk on the Street,” telling investors that he made a mistake and was wrong about recommending Meta in June. That alone upgrades the stock to a “buy” in my book (LFG with the inverse Cramer ETF, Tuttle Capital).
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