Meta realizes it ‘doesn’t control its destiny,’ says the analyst

Needham Sr. Analyst Laura Martin joins Yahoo Finance Live to discuss Meta earnings, Mark Zuckerberg’s vision for the metaverse, and the transition from spending to Facebook’s core business.

Video Transcript


AKIKO FUJITA: OK, let’s continue the conversation around Meta. We have Laura Martin, Needham Senior Media and Internet Analyst. Laura, you know, Ines and I were talking about what we heard on the call yesterday. We didn’t even touch on the digital ads part of it, Reels is definitely one of Facebook, Meta made a big bet. They say they haven’t monetized it in a big way. But that’s interesting in your notes– you say there’s been a deafening silence of this historic ad business that’s become hugely profitable over the years.

LAURA MARTIN: Yes, I thought the most interesting takeaway was silence. And I thought the best big call question for everyone to hear is that everything you talk about is new. It all seems very experimental. Why is this not experimental to you? And what about the old business?

And I think– and I think Mark’s answer is, like, either he’s not focused on the old business, or he doesn’t think there’s a future in the old business. But what they didn’t really talk about yesterday was the business that is now worth a $300 billion market cap and used to be worth a $700 billion market cap. It’s almost like he walked away from the main profitable business– historically made all the money. I thought that was the most interesting thing from the call.

INES FERRE: And, Laura, I mean, when you talk about leaving the core business, I mean, should he focus on Facebook? Is this what investors want? They don’t want this kind of experimentalism in the future, and especially in a time like this. Do you think timing had anything to do with it?

LAURA MARTIN: I mean, I think your point is fair that today’s market wants current cash flow. It wants to carry lower risk, so it wants cash-on-cash returns. I’m just– I think the way I read his choices is that he’s worried about not having a core business unless he can stop TikTok, like he’s worried that TikTok will take away all his content creators and audience he.

And like Myspace, when, you’ll remember, Facebook took away all of Myspace’s value, to me he was worried that TikTok was going to take away all of his value unless Reels, which was his knockoff of TikTok, worked. So my feeling is that this is a Facebook business, where every 10 years Snap comes along, and he has to copy it or die. TikTok arrived and had to copy it or die. One of these days, you won’t be successful in copying the hot new thing. And I just wonder if there is really a business here that is defensible.

AKIKO FUJITA: Yeah, I mean, Laura, to that point, we’re talking about the difficult environment that Meta already faces in terms of regulation. We know what the track record is with these acquisitions, whether it’s an acquisition or getting an idea from another company. If you look at where they want to go in the metaverse, I mean, how convinced are you that the innovation within is there to make it even a long-term business?

LAURA MARTIN: Look, I think Facebook realized– or Meta realized now that it doesn’t control its destiny. It doesn’t own its content because today’s content creators are leaving it to create content on TikTok and take their fandoms with them. And it doesn’t own its distribution platform because it sits with Apple, and Apple is fickle and arbitrary about changing its rules. And Apple doesn’t really care if its rules offend Meta.

So I think Meta’s answer to that is we create a new computing platform like AR, VR glasses where we are the background of the platform, we charge others 30%, and we change our rules which are volatile and arbitrary and offensive apps on our platform. I think that’s what they’re playing there. I think this will really increase when Apple starts making privacy changes in the fourth quarter of 2021.

So I think he realizes, like a lot of apps, that as long as Apple or Android control the rules on their platform and they answer regulatory concerns on their end that– and no app is safe. There is no app that controls its destiny. So his play in the metaverse is to actually own the hardware that is the platform that consumers use so he can charge 30% and change the rules.

AKIKO FUJITA: So with that said, Laura, what do you– where do you value this company? Is it about future play, is it metaverse play? Or is it still a social media company that has yet to compete in an increasingly crowded environment?

LAURA MARTIN: I’d say the latter, which I think is hard to appreciate because it’s not clear there’s a major business here if they can’t successfully replicate TikTok on Reels. So I think the core business value is a big question mark, especially– maybe outside the US is OK. But in the US, it’s really worrying.

And then the metaverse, you have to put a value– to value this company, you have to decide, is the metaverse going to work or are we going to write off $10 to $20 billion a year in his spending until he figures it out. it won’t work? So I think that’s the value issue in this company right now. It’s hard to value the core business in a network effects business going the wrong way.

And it’s hard to value what the metaverse will be worth because at the earliest, he says it will be worth it in 2030, which seems far off for investors. So I think investors are doing the right thing right now by using their liquidity and getting out of shares until it becomes clear what the value of either the core business or the value of those metaverse investments, both of which are hard to appreciate today.

AKIKO FUJITA: Yes, it’s definitely a steep drop from yesterday when you look at where the stock is down today. Laura, always good to get your insight. Laura Martin, Needham Internet Analyst there.

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