Meta Platforms (META), has serious challenges in front of it:
- Apple’s permission-based Ad tracking has hit META and other iOS app developers hard. Apple’s iOS change is the primary reason why META’s average price per Ad dropped 14% in the June quarter. This reality is not going away and META would be smart to find sources of recurring revenue to replace lost Ad revenue. More acquisitions such as its 2020 $1 billion acquisition of Kustomer would make sense. Replacing lost Ad revenue should be the number 1 priority at META.
- Weak macro environment. The weak economic backdrop is out of META’s control, yet the company can play offense and aggressively pursue new sources of revenue. M&A is our preferred tool.
- The Metaverse is a long-term luxury, not a near-term solution. Mark Zuckerberg may find building out the Metaverse to be intellectually engaging, but this risky pursuit ought to be a luxury afforded to companies that enjoy a growing core business(es). Apple (AAPL) and Microsoft (MSFT) are two perfect examples and both have AR/VR/Mixed Reality initiatives.
- Management lacks turnaround experience. Zuckerberg remade his management team in 2020 with younger executives that have been with him since the early days of Facebook. Who among them has turnaround experience? Who among them will tell Zuckerberg what he needs to hear even if he doesn’t want to hear it? Who is willing to tell Zuckerberg “No”?
- Instagram went from leader to follower. META’s original Facebook platform hasn’t been “cool” for years and Instagram – once the social media leader – has been rewriting its algos to more closely mimic TikTok. Monetizing Instagram is not the answer to returning META to growth. In fact, the harder META pushes on Instagram Ads, the more it will churn users.
- Valuation. What do you pay for a company that is likely to see declining revenues for some time? Even if META brings OpEx in-line, the company is clearly a turnaround story. The Metaverse is not the answer to returning the company to growth in the near-to-intermediate term.
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