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Meta - If You Build It, They Will Come
Hi everyone - after yesterday's (admittedly mediocre) earnings release from Meta, I've decided to throw together some thoughts on the company its long term investment prospects. Quick disclosure, I am long $META & this isn't a recommendation!


  • The Bear Thesis & Why it's Wrong!
  • Family of Apps - Competitive Headwinds but Levers to Pull
  • Reality Labs - Hero or Zero?

**The Bear Thesis:**

Facebook (Big Blue) is a dying app and Instagram is soon to follow their footsteps. Competing apps, like TikTok, BeReal, or $SNAP, are much more popular among younger generations which bodes poorly for Meta's user growth. There are also countless businesses across streaming, gaming, etc. that are vying for a share of user screen time - adding more competitive pressure to Meta's margins. This will get worse, as Apple's new policy on app tracking and privacy has kneecapped Meta's ability to deliver detailed insights to marketing departments and advertisers.

Finally, Reality Labs is a money pit and an implicit acknowledgement from Zuckerberg that the core business does not have any terminal value. The name change appears very hand-wavy in the wake of regulatory scrutiny, Apple's privacy changes, and TikTok's encroachment. Also, virtual reality products have mostly failed to find success in market, despite ample funding. Meta's association with activity tracking, data mining, and other nefarious practices will hinder their ability to buck this trend. Even if Meta manages to succeed in VR, the company will carry a materially different margin profile and may not be able to extract economics from this business like Apple does from their App Store.

Why it's Wrong

While there are certainly other social media companies vying for a share of consumer screen time, there has been little indication that Instagram, WhatsApp, or even Facebook, have become less popular in recent quarters. Yesterday, the company reported a slight gain in Family Monthly Active People - highlighting that nearly 50% of the world's population uses a Meta product at least once a month.

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Big Blue - the Facebook App - also saw a gain in users, including in the U.S. & Canada. If we're to assume that the combined countries have a population of 370MM - over 50% of US & Canadian citizens use the Facebook App daily.

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Now the Apple Privacy changes are a material headwind - estimated to be worth $9B in '22 according to Meta. This was reflected in the 14% drop in price per ad last quarter, which can be traced to the cyclical nature of advertising spend, competitors stealing share, and Meta's struggles with ATT. These causes are not certain, but likely. Then again, it's apparent to me that Meta is actively pursuing remedies to this issue. Reels - which appears to be their fastest growing product - does not currently monetize at the rates of Stories and Feed. The company, however, believes this segment to reach monetization rates similarly to Feed, as they grow more familiar with the dynamics of the product. According to management, Reels surpassed a $1B run rate last quarter, quicker than when Stories were monetized in '19/'20. Meta believes their ability to extract value from these products will be driven by the company's strength in artificial intelligence, which they believe to be a competitive edge over other social apps in surfacing appealing content and reaching targeted audiences.

Family of Apps

In addition to Reels, I believe there are several levers that Meta can pull to unlock value from their vast user base, AI capabilities, and relationship with small business. For starters, I believe Facebook Groups & Marketplace should leverage the social graph of their user base to drive engagement and monetization. Users are attracted to Groups in particular because the users are transparent (Meta's products are some of the only recreational social apps in which users are their real selves) and the group is relevant to their needs (I.E. - College Housing & Roommate Groups). The company should lean into this feature more - particularly as users seek to distinguish external "Creator Content" from content within their social graph. Groups can also be more attractive for advertisers, as a group seeking apartments in a new college town may have members looking for a new backpack or laptop. This kind of focus gives Meta some leverage in the ATT issue, as advertisers can derive stronger insights from specific ad targeting.

As for Meta's stance in digital commerce - it's clear to me that small businesses use Meta's products as a digital storefront - posting about promotions, new merchandise, or other events to attract customers. Next time when you walk into a local market, look around and see if you can find their Instagram handle anywhere! Give them a follow!

This direct line of communication between customers and merchants can be incredibly valuable to these businesses, particularly as smaller merchants hold very little control over customer data with competing marketplaces ($AMZN). WhatsApp, which is the world's most popular communications app with over 2 billion estimated users, launched WhatsApp Business in Spring '21, enabling direct messaging from sellers to their customers. While pushing for WhatsApp to become a "SuperApp" feels dramatic - the WhatsApp platform has potential to consolidate so many features - Payments, Messaging, Shopping, all into one app.

As a matter of fact, I am disappointed to see the dissolution of Meta's payments and wallet product as I believe their digital commerce efforts would be augmented by safe and secure payments. Nevertheless, I am optimistic that Meta's management will continue to identify ways in which they can monetize their products, particularly on the commerce side.

Reality Labs

Because Meta is an easy punching bag, the headlines today will likely read "Meta loses $2.8B on the Metaverse". It's not untrue - Reality Labs posted net income of -$2.8B on $450MM in revenue, a burn rate typically found in early stage startups. While the magnitude of Meta's investment in this area is not unsurprising, the hit to the company's profitability is definitely material. In Q2 '22 - Meta's operating margin fell to 29%, from 43% last year, as capital expenditures rose to $14B YTD. The magnitude of this capital expenditure is massive in comparison - other companies have outlayed similar levels of expenditure for semiconductor fabs or fiber optic cables, which makes this wager feel much more significant. But, is it fair to compare semiconductor spend to what critics have called, "Zuckerberg's Matrix"?

I personally believe so. To borrow the enthusiasm of Oculus founder Palmer Luckey: Virtual reality is the final frontier of computing. Once users have a tool that allow them to experience any medium in any time or place - it's hard to see where we would go next. Of course, this technology is not a reality yet - there are countless obstacles to adoption, not to mention lack of widespread appeal. Meta is aware of this - as evidenced in their investment into server bandwidth and EMG technology. The gargantuan capital expenditure commitments is a Field of Dreams approach ("If you build it, they will come") to the metaverse economy. By providing consumers a leading-edge VR headset that depicts high-resolution visuals and 4-D experiences, Meta has the opportunity to own the operating system, the software, and the wearables of the metaverse.

Without making a crude estimate on the VR headset market - I believe this model resembles that of Apple or Microsoft today, in which they've vertically integrated their hardware, operating system, and app marketplaces within their respective markets. These models are clearly attractive, too: Microsoft and Apple are two of the most successful companies in the history of the world. Meta, if successful in this endeavor, has potential to surpass those two businesses on reputation and prowess.

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