A few days ago, on the old yuppie account, we talked about Sun Yuchen’s decision to turn around and exit. In Sun Yuchen’s investment career, he likes to take a radical route, and his life-long risk-loving investment strategy has also ushered in a complete change.
Even Sun Yuchen, an investment maniac, has not been able to defeat the dismal slump in the bear market. Today we will take a look at the “failure” story of another big man.
Given Meta Platforms’ past failures with other non-core projects, Mark Zuckerberg’s decision to double down on the money-losing Metaverse project could easily backfire.
Today we detail why we have every reason to believe Meta’s Metaverse project is doomed, and how much shareholder value is lost by moving to the Metaverse.
Why engage in a metaverse?
A few months ago, The Wall Street Journal reported that Meta and Apple had held numerous talks in recent years about launching a subscription version of Facebook. Meta’s app has always been one of the most downloadable apps on the App Store, but Apple executives at the time were very unhappy that their company didn’t get any revenue from Meta apps. After the two parties failed to reach an agreement, Apple decided to release the iOS update version 14.5 in April 2021, allowing users to decide whether to share personal data with third parties such as Facebook or Instagram.
Because of this decision, Meta began to struggle to effectively track its users. The same Wall Street Journal article said that only 37 percent of iOS users agreed to share their data, leading to lower returns on ad spend for advertisers and a drop in ad revenue for the company. The table below shows that Meta’s annual revenue growth percentage began to gradually decline after 2Q21 and turned negative in the last two quarters. While the recent decline can be attributed to an overall decline in ad spend due to macroeconomic events, the ad market is still growing positively in the second half of 2021, suggesting that Apple’s privacy updates were the main reason for Meta’s weak performance over the past year and a half.
To all shareholders, it’s clear that Meta’s management needs to do something to stem the losses and reverse the trend. The problem is that Facebook’s leadership, with Mark Zuckerberg at the helm, appears to have swerved in the wrong direction, which has negatively impacted the company’s financial health.
For now, Mark Zuckerberg’s solution to his growth problem is to double down on Meta’s Metaverse project. There are many problems with this. First off, there’s no clear definition of what the Metaverse actually is, as the name itself comes from a dystopian science fiction novel set in a fictional world from decades ago. Meta describes the Metaverse as follows:
A “metaverse” is a series of virtual spaces in which you can create and explore with other people who are not in the same physical space. You can work, play, study, shop, create and more with your friends. It’s not necessarily about spending more time online, but about making the time you spend online more meaningful.
Also, a year ago, when Meta was being rebranded, The Verge wrote an article about the company, noting that Mark Zuckerberg believed the Metaverse was the future of the internet, where people would spend time in fully immersive interact with each other in a 3D world. Meta continues to double down on Mark Zuckerberg’s vision, even though we don’t know if it will ever become a reality.
To fully realize this vision, Meta has been actively developing hardware and software solutions that will help create immersive Metaverse environments. On the hardware front, the company recently launched two headsets, the Meta Quest 2 and Meta Quest Pro, priced at $399.99 and $1,499.99, respectively. On the software side, the company released the video game Horizon Worlds, which allows users to enter for free if they own the company’s headsets, and communicate with each other in a virtual world. However, despite these developments, we still can’t really figure out how they’re going to fix Meta’s declining business for the foreseeable future.
Meta’s biggest problem seems to be that it can’t offer an easy solution to the growth problems caused by Apple’s tracking policy change, so it’s now turning to non-core solutions that aren’t guaranteed to show any meaningful returns in a short period of time. At the most recent shareholder meeting, Meta’s management didn’t offer any specific reasons why the company should move from a social media company to the Metaverse, nor did it offer any practical solutions on how to monetize the Metaverse itself.
Even if we assume that the company’s goal is to improve the efficiency of its advertising tools by tracking headset users to understand their behavior in Horizon Worlds and based on this data, display relevant ads on its platform. approach has at least some flaws.
For starters, there’s no guarantee that Meta’s headset will track these movements accurately in the first place. Second, if Meta plans to take this approach, the cost of acquiring customers alone will skyrocket. Let’s not forget that it doesn’t take much for a user to join Facebook or Instagram, since those apps are free, which gives Meta more data to leverage. In the former, users first need to purchase an expensive headset, which already reduces the potential user base because of the high cost of purchasing such a headset.
At the same time, in order for users to buy such an expensive headset, there needs to be an attractive software offering. Herein lies another problem. At this stage, Meta doesn’t seem to have anything interesting to offer users to make their experience smoother. Given Meta’s past failures with non-core projects, I wouldn’t be surprised if Horizon Worlds and the entire Metaverse project fails over time.
However, even if we assume Meta succeeds in solving all of the above problems and becoming the largest Metaverse company in the world, the question will be how big is the market for the Metaverse itself. Given that Meta considers the Metaverse to be an immersive 3D world, we need to first figure out how big the virtual reality market is. As far as I know, some reports indicate that the virtual reality market is worth $28.42 billion in 2021 and is expected to reach $87 billion by 2030. That could be considered a big number, but in reality, even though Meta owns the entire VR market, the revenue it gets from it is still far less than its Crypto advertising business.
Additionally, there are reports that the Metaverse market itself is worth close to $60 billion in 2021 and could exceed $1 trillion by 2030. However, such reports are problematic because they are highly dependent on the growth in value of various NFTs, which themselves have become worthless in recent months as the cryptocurrency market has crashed. In the current environment where the Federal Reserve continues to rise and implement quantitative tightening, it is difficult to see how the cryptocurrency market will recover, so it is unlikely that NFT will gain momentum again in the short term. Reports that claim the Metaverse market could be worth more than $1 trillion in the next few years are therefore questionable.
With all of this in mind, even if the 2021 numbers in these reports were correct, it would be hard to justify Metaverse’s investment in the Metaverse, as its core Crypto advertising business generates more revenue annually than the entire Metaverse market. expected size. To make matters worse, Meta’s management doesn’t seem to care about this, as they’ve poured $36 billion into the Metaverse project over the past few years and plan to continue to aggressively spend more on it, despite Reality Labs The division has posted losses of more than $10 billion this year alone.
Beyond that, capex alone is expected to be $32-33B and $34-39B in FY22 and FY23, which is significantly higher than historical averages, versus Google, which has twice the revenue of Meta capital expenditures are similar. The rationale for the increase in capex is also relatively murky.
To understand how important this all is, I created a new DCF model to show how much shareholder value was lost due to Meta’s obsession with the Metaverse and the need to invest more money during the market downturn. My DCF model shows that Meta has a fair value of $161.37 per share, while this new model shows that the company could have had a fair value of $196.89 per share had the company’s capital expenditures stayed within historical averages. However, since this is not the case, investors in Meta will receive substantially less than expected.
If we take a look at the company’s latest earnings report, we can see that its core business has continued to hit new important milestones despite a cyclical decline in revenue caused by lower ad spend. During the third quarter, the Meta family of apps, which includes Facebook, Instagram and WhatsApp, saw user growth again. Meanwhile, the company’s Reels product is on track to generate $3 billion in revenue this year alone, which will help Meta mitigate some of the risk posed by Apple’s tracking policy changes, and justify management’s need to seize what exists in its core Crypto ad business. opportunity. Furthermore, if TikTok is banned in the US, Meta could even become the largest short video content platform in North America, which would open up new monetization opportunities in its core Crypto advertising business.
We’re not saying that all metaverses are bad ideas, it’s just that given the above, there’s good reason to believe that Meta’s metaverse is nothing more than a bottomless pit, as so far there doesn’t seem to be a clear idea of how to make it profitable know. While its core business has shown solid performance recently, losses are mounting and Meta Platform’s shareholder value is being destroyed.
Information sourced from seekingalpha, slightly modified, by Bohdan Kucheriavyi
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