In “Meta: A Precarious Position”, I concluded with the following:

“A thoughtful discussion on Meta must now address concerns around FoA user growth and engagement (most notably for the blue app), a competitive threat from TikTok, the impact of IDFA and regulatory headwinds on revenue growth, the massive expense ramp (which will continue into FY22), and the ~$10 billion of annual losses at FRL (with very little that we can tangibly point to as the output from that investment). That’s a lot to work through. And when you finish that exercise, I think you inevitably conclude that this bet requires a lot of trust in Zuck and the team (that’s always the case, but this is at another level). Given their impressive track record, I think they’ve clearly earned that trust; however, their actions of late are quickly putting that to the test (to paraphrase Buffett, it took 17 years for Zuck to build a reputation with investors and six months to ruin it).”

That change in perception and lack of trust, most notably as it related to the belief / concern that Zuck was willing to spend an ever-growing sum at FRL, led to a market cap decline following Meta’s Q4 FY21 earnings of ~$250 billion, the largest one-day drop for a company in stock market history.

But right out of the gates on the Q1 FY22 call, it was apparent that management - and specifically Zuck - had come to appreciate the importance of addressing this issue more directly and transparently for shareholders (sorry for the long excerpt, but this is an important topic):

“I think it's useful to level-set on our business trajectory over the last few years. After the start of Covid, the acceleration of e-commerce led to outsized revenue growth, but we're now seeing that trend back off. However, based on the strong revenue growth we saw in 2021, we kicked off a number of multi-year projects to accelerate some longer term investments, especially in our AI infrastructure, business platform, and FRL… But with our current business growth levels, we're now planning to slow the pace of some of our investments… On FoA, I’m confident we can return to better revenue growth rates over time and sustain high operating margins. In FRL, we're making large investments to deliver the next platform that I believe will be incredibly important both for our mission and business - comparable in value to the leading mobile platforms today. I recognize it's expensive to build this - it's something that's never been built before and it's a new paradigm for computing and social connection. Over the next several years our goal from a financial perspective is to generate sufficient operating income growth from FoA to fund the growth of investments in FRL while still growing our overall profitability. That's not going to happen in 2022 given the revenue headwinds, but longer term that is our goal and expectation.”

This commentary has put some much needed guardrails around FRL (which, by the way, still generated an operating loss of ~$3 billion in the quarter). In addition, it was encouraging to see management express some optimism on the long-term trajectory for FoA, which is facing its own headwinds.

As I noted recently in a post about Disney, the interplay between Mr. Market’s views on a company’s long-term prospects / strategic vision and how management chooses to react to that signal can be an interesting dynamic. There are times when management should rightly disregard the short-term worries of the stock market and plow forward. On the other hand, there are also circumstances where I believe Mr. Market’s skepticism should be viewed as a sign to management that an alternative approach should be considered.

With Meta, the market (rightly) expressed concerns about FRL, most notably the scale of investment given management’s own admission that the segment was unlikely to be a material driver of the business at any point in the current decade. With the Q1 commentary, we now have a clearer understanding of how these investments are likely to evolve over the coming years (“the goal is to continue growing operating profits and to fund FRL through that growth of the FoA business”). Management took Mr. Market’s skepticism as a valid reason to consider an alternative approach, primarily in terms of how they communicate their long-term vision with shareholders; in my opinion, it was a much needed change and an important step in the right direction.