Mark Zuckerburg Faces Shareholder Ire as Meta Platforms Stock Sags

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Altimeter Capital Chair and CEO Brad Gerstner has written an open letter to Meta Platforms board and its CEO Mark Zuckerburg calling upon the company to “get fit.” The letter comes ahead of the company’s third-quarter earnings call.

In the letter, Gerstner calls upon Meta “to streamline and focus its path forward.” The letter said, “Like many other companies in a zero rate world — Meta has drifted into the land of excess — too many people, too many ideas, too little urgency. This lack of focus and fitness is obscured when growth is easy but deadly when growth slows and technology changes.”

Meta Platforms stock has slumped this year

He pointed to the slump in Meta Platforms stock and said that it has underperformed its tech peers by a wide margin. Notably, with a YTD loss of over 60%, Meta is not only the worst-performing FAANG stock but is also among the top S&P 500 losers. While Netflix was the worst-performing FAANG stock, it gave up the dubious title after last week’s rally.

Netflix impressed markets with its third-quarter earnings and outlook. Markets are also bullish on its upcoming ad-supported tier which would be launched early next month.

Meanwhile, in the letter, Gerstner said that Meta Platforms’ PE multiple has slumped from 23x to 12x and its multiples are now less than half of its peers. He added, “this decline in share price mirrors the lost confidence in the company, not just the bad mood of the market.”

Mark Zuckerburg faces tough questions from investors

Gerstner however added that Meta Platforms’ core business continues to do well, pointing to the $45 billion in operating profits last year. He recommended a three-step plan which he believes would help the company double its free cash flows to $40 billion annually.

Gerstner said that Meta Platforms should lower its headcount by 20%, cut its annual capex budget from $30 billion to $25 billion, and limit its investment in metaverse and Reality Labs to under $5 billion.

Meta Platforms is overstaffed

To be sure, even Zuckerburg has admitted that Meta Platforms is overstaffed. The company has also laid off some employees but not to the scale that Gerstner is recommending. Providing his rationale for a 20% headcount reduction, Gerstner said that it would take the employee expense to what it was in mid-2021.

He added, “I don’t think anybody would argue that Meta wasn’t sufficiently staffed in 2021 to tackle a business that looks similar to how it looks today.”

Digital ad spending is slowing down

Notably, digital ad spending is slowing down and the most recent reminder came from Snap last week. The company not only missed Q3 revenue estimates but also provided dismal guidance.

In its shareholder letter, Snap said, “Our revenue growth continued to decelerate in Q3 and continues to be impacted by a number of factors we have noted throughout the past year, including platform policy changes, macroeconomic headwinds, and increased competition.”

It added, “We are finding that our advertising partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures, and rising costs of capital.”

Metaverse cash burn

According to Gerstner, Meta Platforms’ capex budget is too high, and said that its capex budget was above the combined capex of Apple, Tesla, Twitter, Snap, and Uber. He added, “we believe the company can responsibly and reasonably reign in capex while continuing to invest aggressively in AI and other critical areas.”

Gerstner also said that Meta Platforms should not invest more than $5 billion annually toward building the metaverse. Last year, Facebook changed its name to Meta Platforms to signal its bet on the metaverse. The company burnt over $10 billion in cash in the metaverse business last year and continues to burn billions of dollars in the business this year also. The metaverse is yet to contribute meaningfully to Meta Platforms earnings and is currently a drag on its earnings.

Also, not all are convinced about the outlook of the metaverse and whether Meta Platforms would be a leader in that business.

Meta Platforms is facing multiple headwinds

Meta Platforms is facing multiple headwinds, both on the macro as well as the micro level. The sell-off in tech stocks has taken a toll on Meta Platforms stock also. Also, there has been a slowdown in global digital ad spending which has hurt the earnings of social media companies like Facebook and Snap.

The iPhone privacy rules have also hit Meta Platforms and it estimates that the changes would lead to a $10 billion revenue loss in 2022. In the second quarter of 2022, Meta Platforms reported revenues of $28.82 billion which were slightly below what it had posted in the corresponding quarter last year. It was the first time since Facebook went public that it posted a YoY decline in revenues.

Meta Platforms’ growth has sagged amid macro headwinds

Meta Platforms forecast revenues between $26-$28.5 billion in the third quarter which would mean the second consecutive quarter of revenue decline. The company blamed the “continuation of the weak advertising demand environment we experienced throughout the second quarter, which we believe is being driven by broader macroeconomic uncertainty” for the tepid guidance.

Wall Street analysts also expect Meta Platforms’ revenues to fall over 4% YoY in the third quarter.

Facebook’s popularity has come down

What’s more troublesome for Facebook is that it is losing popularity among teens who are instead turning to TikTok. Even YouTube’s revenues have been hit by TikTok’s popularity and it is now focusing on “Shorts” to better compete with TikTok. Instagram was also looking to launch a new version for teens last year but it was throttled by US lawmakers.

Meta Platforms’ massive cash burn in building in the metaverse is also making markets apprehensive. In his letter, Gerstner said, “people are confused by what the metaverse even means.”

He added, “If the company were investing $1–2B per year into this project, then that confusion might not even be a problem.” Gerstner said that Meta Platforms should limit its annual capex towards the metaverse to only $5 billion instead of the $10-$15 billion that it intends to do currently. He however added that once the metaverse starts to show a tangible return on investment, he and other investors would support scaling up investments.

About Mohit PRO INVESTOR

Mohit Oberoi is a freelance finance writer based in India. He has completed his MBA in finance as a major. He has over 15 years of experience in financial markets. He has been writing extensively on global markets for the last eight years and has written over 7,500 articles. He covers metals, electric vehicles, asset managers, tech stocks, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.