The Social Network
Iβve been an investor in Facebook for a number of years now. Itβs always been a solid tech company, with enormous growth, market dominance and global reach no other social media company can even dream of.
Some Facts
Facebook has 2.91 billion monthly active users.
36.8% of the world's population use Facebook monthly.
77% of Internet users are active on at least one Meta platform.
Facebook's annual revenue increased by 2,203% over 10 years.
79% of monthly users are active daily
Users spend an average of 19.6 hours a month on Facebook
In the last year or so, weβve seen a major pivot, with Facebook rebranding to reflect ownership in Instagram, WhatsApp, and a whole host of other companies. No longer is the company centred purely around Facebook, or a company which investors are speculating on, itβs an established advertising and media giant.
A Growing Empire
Since their IPO in 2012, theyβve been on a campaign of buying up established companies in the VR, messaging, advertising and entertainment sectors, building an empire with multiple areas of potential expansion.
They also rebranded in June from Facebook Inc. to Meta Platforms Inc, reflecting a desire to move into building the foundations of an emerging concept called the metaverse.
What is the Metaverse?
The metaverse means different things to different people, but the crux of the idea is a virtual or augmented reality, where users can work, play, and interact with loved ones and strangers alike. Expected to be worth over $1T per year (Grayscale), the industry is one of the most descriptively vague, but potentially lucrative weβve ever seen.
Most companies are trying to get on board with this concept to some degree, with the recent pandemic bringing the work at home revolution, rise of immersive gaming such as Roblox, and enhanced hardware making the enormous amount of processing power required a reality.
Microsoft are developing AR/VR working at home solutions
Nike developed a virtual fashion line for users
Disney has invested heavily in virtual storytelling
Coca Cola has developed NFT collectibles for metaverse users.
Iβve had some personal experience with working on VR headsets as part of engineering inspections, but this is a long way from any industry adoption at scale.
Obviously, there are varying degrees of usefulness in these, where the majority of the initial hype is probably down to the novelty and uniqueness of the product, but whether the concept of a metaverse is going to be the next big thing, such as 3G or the WWW. breakthrough, or fizzle out such as 3D TVs.
The Gamble
Back to Meta Platforms, which has seen a difficult 2022. What started the year trading at $338, the stock has now sunk to well below $90, with a difficult macroeconomy and rising inflation twinned with investor confidence declining in the company.
One of they key issues for the company this year has been Appleβs recent iOS update to ask apps not to track user data. This naturally hit Metaβs revenue significantly, limiting the amount of advertisements it could target to users.
This, alongside the rise of competitors such as TikTok, obviously hit the core business which Facebook originally made such a roaring success, but CEO Mark' Zuckerbergβs focus has been shifting to his new metaverse project as a solution.
The company has sunk $22 billion into expenses in this quarter alone, jumping 19% since the same period last year. A huge chunk of this expenditure has gone into Metaβs Reality Labs unit, which is responsible for developing the virtual reality and related augmented reality technology underpinning the metaverse.
So far, the unit has lost $9.4B, with low sales of the teamβs Quest 2 headset leading to a 50% drop in revenue.
The Q3 earnings call suggested that Meta expected to further increase their quarterly losses in the unit, but is this a short term hit in order to get a step closer to dominating the market?
The product itself is fairly impressive, with engaging and interesting content, allowing users to expand their workspace, play games, and enter a whole new world of discovery and education. But at $1500, will this really be a device which is viable at scale?
Plenty of investors would be delighted if Meta bailed on the entire metaverse experiment, instead focussing on what made the company so successful in the first place.
Rachel Foster Jones, a thematic analyst at GlobalData says:
βThe cost of Mark Zuckerbergβs metaverse ambition is clearer than ever. Meta has put its entire business on the line for the metaverse, which still doesnβt exist, and the gamble is not paying off.
Meta has been too busy attempting to push the metaverse that it has run its core ad business into the ground, and a string of poor results has taken its toll on investor confidence.β
Will it Work Out?
For the company to start seeing results, it needs to start finding a balance between the short-term results, and the potential to see longer term innovation, such as how Tesla has devoted some focus to its Optimus robotics programme without sacrificing execution in the core business.
Thereβs no denying though, weβve been surprised by Mark Zuckerbergβs foresight in the past, taking Facebook mobile when users insisted it should be a desktop only platform, adding Stories to the platform, and investing in giants such as WhatsApp and Instagram before their peak.
If he can develop the metaverse into a genuinely useful and entertaining product, then Meta will be uniquely positioned to take advantage of its enormous user base, allowing the cost of the hardware itself to come down into affordability.
I see the next year being critical for Meta. If investors continue to flee the sinking ship, then Zuckerberg may be in a dilemma of sticking with his conviction, and risk losing the company he built, or shelving the metaverse, and losing out on being a pioneer.
However, if the metaverse can take on a meaningful customer base, and develop some genuinely useful products ahead of competitors such as Apple, then it could be a really lucrative gamble.