A Bet on Meta Remains a Bet on Zuckerberg That I’m Not Willing To Make

The decision by Facebook to rename the company to Meta Platforms (NASDAQ:FB) drew investor interest and political scorn. FB stock reversed an decline for the month following the news, increasing 6.24% since the Oct. 28 reveal.

Meta logo is shown on a device screen. Meta is the new corporate name of Facebook.
Source: Blue Planet Studio / Shutterstock.com

The idea is simple enough. CEO Mark Zuckerberg is building a new “virtual world,” based on technology found in the company’s virtual reality headsets, formerly called Oculus.

Facebook would control the software, and the services derived from it, eventually replacing the existing Facebook and Instagram platforms. A “clear strategic shift for the company,” according to Loup Ventures’ Gene Munster and Andrew Murphy.

Faster processors, faster networks and bigger clouds make it possible. As a 10-year plan it makes sense. It’s a direction the whole tech industry sees as logical, as “the next big thing.”

But Meta may not be as well-positioned as it thinks to pull it off.

Facebook Front

That’s because most Meta markets don’t support the metaverse, a shared virtual 3D world, or worlds, that are interactive, immersive and collaborative.

Facebook is huge in places like India, Africa, Southeast Asia and South America. Hundreds of millions of people who can’t afford paid services depend on Facebook’s free services as their outlet to the world. Facebook’s Oct. 4 outage was a good joke in the West. It wasn’t funny for these customers.

At the same time, political pushback in Europe and the U.S. is threatening the company’s cash flow. And, there’s a lot of cash flow to threaten. Facebook reported $14.1 billion in operating cash flow during the third quarter. That was reduced by $1.7 billion only because management opted to buy back $13.4 billion of stock.

Buybacks offset the negative publicity and the Facebook ship sailed on. Net income rose 17% year over year to $9.2 billion, or $3.22 per share, on a 33% revenue increase to nearly $28.3 billion. Shares rose on earnings.

Now that whole profitable ship is being turned around. Shares are down 7% over the last three months, despite the outstanding results. The price to earnings multiple is 24. That’s cheap when you’re growing 33%, at scale, and bringing $1 in every $3 to the bottom line. Alphabet (NASDAQ:GOOGL), the only other Cloud Czar whose business model is mostly built on ads, sells for 28 times earnings. Meta says 97% of its revenue comes from advertising.

Escape to the Future

Smaller companies do this all the time. They change the mission, change their name and no one is the wiser.

That may not be possible with Facebook, writes Denise Yohn at the Harvard Business Review. The name is changing long before the Meta services are ready.

Facebook hopes the futuristic rebrand will help it escape its past, whose harms are only now coming to light. It’s not just American politics that have been hacked by big Facebook creators, according to whistleblower Frances Haugen. It’s a global problem. Worse, Zuckerberg apparently knew this was happening even as he denied it.

But the rebrand is going ahead anyway. Meta is launching a new ad campaign by Spark Foundry, part of the Publicis Group (OTCMKTS:PUBGY). The campaign will be aimed as much at other ad agencies which depend on Facebook as at users.

Meta’s low price, stellar results and past track record mean Wall Street still believes in it. Only 1 of 36 analysts is telling clients to sell, according to data collected by TipRanks. The average one-year price target is $405.59, almost 24% ahead of the Nov. 3 closing price of $331.62.

The Bottom Line

Facebook is getting a “cigarette discount” right now. It looks cheap because of its controversies.

But to buy it, you must believe in Mark Zuckerberg. He’s fighting a two-front war. He’s both defending himself against western critics while shutting down facial recognition. He’s plowing ahead with virtual reality long before his user base can support it.

It’s the greatest high-wire act in the history of business. If Zuckerberg chose to step down or step back, a more politically savvy executive could take the heat. He could focus entirely on virtual reality. It would probably help the stock. That’s not going to happen.

That’s why I got out of Facebook. The risk looks too great, even if the price looks right. Icarus has flown too close to the Sun.

On the date of publication, Dana Blankenhorn held no positions in stocks mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for Halloween he has a collection of COVID-19 stories https://www.amazon.com/Bridget-OFlynn-Virus-COVID-19-Pandemic-ebook/dp/B09K8PSQC8/ at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.


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