META: Connecting People <Nokia jingle>
An Open Letter from a Contrarian to Mark Zuckerberg (and the Meta Board of Directors); And How to Justify Meta Is Undervalued at 24x PE
Dear Mark,
A few weeks ago, Altimeter Capital CEO Brad Gerstner and longtime shareholder of Meta wrote an open letter to you and the rest of the team at Meta - humbly requesting that you guys pay more attention to the company’s deteriorating share price, and the gradually hostile investor sentiment towards your company. Basically he was telling you to shape up or ship out - with the main vex of his letter being your company’s large cash burn in their Reality Labs segment (i.e. Metaverse).
As a complete nobody with a net worth of less than $1B, I thought that I should weigh in as well.
FY22 has not been a good year for Meta. The past year saw it getting pummeled by one tragedy after another:
1st, the Tech bubble bursting in Oct 2022;
2nd, Apple’s App Tracking Transparency (ATT) fundamentally changing Facebook’s business model and delivering a $10B hit to Facebook’s revenues;
3rd, the apparent disruption of Facebook by social media phenomenon Tiktok;
4th, the botched reveal of their Metaverse; and
5th, the brutal -25% sell-off in its share price when Zuckerberg revealed he was doubling down on his Metaverse strategy.
As recently as 12 months ago, it would have been difficult to justify Meta’s valuation at 30x multiples amidst the peak of last year’s Tech bubble. But after erasing all its gains over the past half-decade, Meta’s share price has finally dipped back into the double digits and is currently treading water at around 8.5x trailing PE. I think that makes the valuation of your company a substantially different call even as bad news continues to pour in.
An analyst friend of mine recently approached Meta’s current valuation this way - given that the bulk of Meta’s revenues reside within the Facebook business unit (i.e. majority of FOA revenues), why not assume that Facebook’s revenue halves into perpetuity and assign an 17x steady-state PE to it (i.e. 2 x 8.5x)? That doesn’t sound like an unreasonable price to pay for what should likely remain the dominant social media platform of our generation - with all its fancy moats and network effects. There are certainly less deserving companies in other sectors commanding those multiples.
For reference, the last time Facebook’s earnings were at roughly half of their LTM earnings of $28B was in FY17 - when it reported $16B in earnings, on the back of $40B in revenues. The latter is 3x less than their LTM Revenues of $118B in the present-day. Even if the looming presence of Apple’s ATT and Tiktok combined lops off a recurring $10B from their revenues going forward, that’d still imply roughly $100B in steady-state annual revenues. And even if we conservatively assume that Facebook’s revenues were cut by half of that into perpetuity to just $50B, their FOA suite of apps could probably still throw off at least FY17’s earnings of $16B annually. Surely that could justify a 17x multiple for a moat-y Tech megacap like Meta?
Of course, it’s not as simple as that once we account for their Reality Labs venture. Since the Metaverse project is expected to be a gigantic capital black hole - which you yourself have alluded could involve an estimated total CAPEX budget of up to $100B over the next 10 years - shareholders today are rightfully concerned that they are basically investing entirely in the Metaverse. This is because most of the future cash flows thrown off from the other business units (i.e. Facebook, Instagram, Whatsapp, etc) will likely be reinvested into Metaverse CAPEX. Even thought this reinvestment of Retained Earnings still legitimately represents ROE if the Metaverse can be successfully realized, the outstanding question is whether the Metaverse will actually succeed or not. For reference, Meta’s entire market cap today is just shy of $250B - which means that you and your team could potentially be squandering away up to 40% of the company’s current market cap.
At the highest level, we can basically boil down the investment consideration for such extended levels of investment into two ‘for’ or ‘against’ arguments. In the ‘against’ camp, critics would point out that even market consensus paints your Metaverse project as a scam for gullible investors - a last gasp effort at restoring your crown rather than an attempt at building a “real” business. Of course, this jaded narrative has in part been contributed by the recent Tech crash - as investor enthusiasm for currently loss-making businesses with a promise to make money one day dissipates into the ether.
However, Meta itself didn’t help matters much when your team presented a faux Zuckerberg avatar in low poly count as the highlight of your Metaverse reveal - which just looks cheap next to the high-fidelity graphics of modern AAA games. To be fair, tech media grabbed basically the worst-looking shot of the entire Metaverse announcement to drive the narrative that the emperor had no clothes - the actual Metaverse avatars actually don’t look half-bad in comparison, as shown in the image below:
Meanwhile, the ‘for’ camp could make the case that this is just another one of Zuck’s magical sleight-of-hand at diversification. Most of us can recall that it was not so long ago that you and your team at Facebook were decisively derided for the magnanimous outlay of capital involved in the acquisitions of Instagram, Whatsapp and Oculus - $1B for a photo filter app; $16B for a messaging app with zero revenue; and $2B for a manufacturer of gamer boy toys with no relationship with your existing businesses. Yet a Meta fanboy could logically argue today that the former two were extremely prescient investments; and that it is actually we mere mortals who fail to ‘Think Different’. Perhaps in 10 years time, we shall look back at the $100B Metaverse capital commitments with same level of awe and wonder as we understand the Whatsapp acquisition today.
When I was first came upon this topic, I found myself sitting in the former ‘against’ camp - for mostly the same reasons as everyone else. To be clear, I’ve never felt strongly about it, nor have I ever done a deep-dive into the business either - it was a more a gut feel after reading a few commentaries than anything. However, after reading a few insightful recent articles about Meta and catching up to what they’ve been doing, I’ve been delightfully surprised to find myself squatting unceremoniously in the ‘for’ camp. Allow me to expound on how a former damned unbeliever came to sing the hymn of the Meta-verse.
(Note: by the way, I know that the “Metaverse” is much more than Meta’s Horizon Worlds project under their Reality Labs segment - and that it isn’t confined to Meta alone. However, that’s how everybody colloquially refers to the Metaverse project, and I don’t want to trouble myself splitting hairs over semantics. So I’m just going to be using both meanings interchangeably here when I say “Metaverse”.)
Check out my recent article below about Trussonomics!
Meta’s Financial Health Today: Actually Not Bad
Mark, your company Meta as it exists in the present-day is currently in a bind. As I’ve described in the opening of this article, it has been repeatedly sledgehammered by a non-stop rain of blows from the business environment - but primarily in the form of Apple’s ATT and Tiktok. For the uninitiated, perhaps some context is deserved here.
Apple’s ATT was introduced in iOS 14 last year. To oversimplify, it puts app data tracking control back in the hands of iPhone users - by requiring them to opt-in to allow apps to mine data outside of the confines of their specific app. This means that if a user chooses to opt-out of such permissions for the Facebook app, it could no longer collect data about the iPhone user’s behavior from other apps. Obviously, this massively reduces the ability of Facebook to generate an accurate profile of the iPhone user - hence dramatically reducing the usefulness of any ad targeting, and thus the ROAS of Facebook ads.
The second problem was the rapid emergence of social media phenomenon Tiktok. Without going into too much detail, Tiktok was better than Facebook at delivering interesting content to the user and therefore started attracting user attention away from Facebook. The market consensus was that this was the death knell for Facebook, since eventually millennials would stop using it and Facebook would just devolve into another Myspace for old people. I don’t want to rehash all the woes germinating in Facebook’s apparently geriatric future, as you can probably find a million articles discussing them on Google.
What I will mention though is that I came across three recent very well-written articles painting the contrarian view for Facebook - which basically boils down to Facebook’s apparent death being overdone. I’ll share them below for the viewing pleasure of anyone who happens to be curious:
The first article presents a very detailed look into the financial condition your company Meta in the present-day. It concludes in a less than optimistic tone and highlights financial headwinds present in Meta’s future; however, it expresses this in a level-headed way that implies room for upside if the team at Meta can successfully execute on their current trajectory.
Stratechery’s commentary on Meta’s Family of Apps (i.e. Facebook, Instagram and Whatsapp) strikes a much more upbeat tone. This is significant as its author Ben Thompson is a household name in the tech industry - and apparently interviewed you last month. Specifically, he covers a lot of ground by describing ‘5 Myths’ in the prevailing narrative of Meta’s present-day business:
Importantly, he describes how 1) Facebook’s engagement levels in its backyard of the USA and Europe hasn’t experienced churn yet; 2) how Instagram’s Reels has somehow caught up to Tiktok rather than being rendered extinct by it; 3) how Apple’s ATT has decimated Facebook’s ad conversion rates but still leaves it as the top contender in a commoditized business; and 4) how Meta’s massive CAPEX spend is actually a justifiable pivot for Facebook’s ad targeting approach, away from deterministic algorithms to AI-based probabilistic algorithms to counter ATT’s impact. Lastly, he also describes the Metaverse as being perhaps a waste of money - but we’ll go into my thoughts on that later.
Finally, Macrovalue’s article presents a very quantitative picture of how most of Meta’s risks have already been priced-in, and that at current share prices there might exist risk:reward asymmetry.
You’ll be happy to hear that the gist I got from reading all of the above articles was that Meta’s apparent demise as prophesied by market consensus has been vastly overdone. While it’s certainly true that Meta is no longer the absolute monolith with its insurmountable moats as described last year by the same lambasting market commentators today, my impression what that the company is going to be fine - and can certainly justify a conservative forward PE of 17x at half of present-day earnings assumption. It may not be the healthiest business, but it’s also not going to jump off a cliff anytime soon. And with many no-growth mature incumbents in other sectors sporting 20x multiples, I fail to see how a global social media behemoth with its much-bandied about ‘network effects’ is going to see its share price crash & burn far below a forward multiple of 17x, and stay there forever.
Keep in mind that this 17x PE assumption holds true even if the Metaverse project ends up being a total writeoff - as Meta’s Family of Apps will still continue to exist and command their social media dominance with just slightly deteriorated network effect moats. Hence, it’s quite safe to assume that they can continue to print money at the current rate into perpetuity - thus justifying my aforementioned 17x forward multiple. Even in this worst-case scenario, the permanent downside for Meta is very reasonably capped at current share prices.
But wait, you might ask. Didn’t the title of this article mention 24x PE instead of 17x? What gives? We’ll explain all that and more later in the Valuation section of this article below. Now let’s talk about the elephant upside in the room: Metaverse.
The Vision of Metaverse, Explained
In the absence of understanding the vision of the Metaverse, I would actually be inclined to raise my pitchfork with the ‘against’ crowd - especially in light of the estimated $100B Metaverse CAPEX spend with no light at the end of the tunnel. However, finally seeing what the team at Meta might be trying to build and where they were coming from made me doubt my conviction about Meta’s demise. Whether or not it actually changes your mind the way it did mine, I’d just like to share this view with as many people as possible.
Mark, you might appreciate better than most why I titled this article “Meta: Connecting People”. It was made in reference to Facebook’s original mission statement:
“Facebook’s mission is to give people the power to build community and bring the world closer together”
Now obviously, I chose my title as a play on Nokia’s familiar tagline “Connecting People”. But if you think about it, Facebook’s mission statement above could also be easily shortened to exactly that too. In the same HBR link as above, Mark describes it as, “Our mission is to connect every person in the world.”
This is how I personally perceive Facebook’s contribution to society - as a means for people to stay connected. Most of us use Facebook to stay connected with friends & family who we don’t usually frequent in our daily lives - e.g. schoolmates, professors, ex-colleagues, acquaintances-in-passing, tourist buddies, etc. Since mostly everyone has a Facebook account, it’s a frictionless way to keep in touch with people who we want to stay in touch with. I know it’s tempting for investors to describe Facebook in capitalistic terms of network effects, ROAS and moats - but at its very core, keeping people connected is how Facebook adds social value to human civilization and therefore justifies its existence.
In much the same way, the Metaverse simply seeks to extend this substance of “Connecting People”, albeit in a different form - but achieve the same principal goal of ‘keeping people connected’. I came to this conclusion after reading this excellent Ars Technica interview with Oculus ‘Consulting CTO’ John Carmack - where he “expressed a preference for spaces filled with a lot of low-detail avatars to Meta's push for the kind of nearly photorealistic "codec avatars" that eat up too much processor power to allow for crowded virtual rooms”. Carmack also expands on his vision for "arena-scale support with thousands of avatars milling around... at least hundreds in large rooms... in a completely uniformly shared world" - saying that he wants "to be present with a live audience in a virtual space where everyone who wanted to could stay afterwards and talk as long as they felt like it."
If you think about it, what Carmack is describing here is the underlying principle of ‘connecting people’ and ‘making the world a smaller place’. The interview had a deafening lack of mention of achieving high-fidelity graphics or the usual technical jargon that tech companies usually intersperse their product highlights with in order to impress audiences (e.g. Macbook Pro 5nm M1X A524 Axion with 512GB storage + 12GB RAM). Instead, Carmack spends most of his time using plain language to painfully and faithfully describe a space where large groups of people willingly come together and… stay together. It almost has a ‘liminal space’ feel to it - this is not how you do an effective marketing interview with a prepared script. His interview comes across very much as a practical mission pursued from the heart - not as a ploy to sell fancy hats. This is coming from someone who listens to a lot of management spiels trying to sell me fancy hats.
In the rest of his interview (almost a rant), Carmack basically lays out the necessary technology & engineering tradeoffs he is willing to make in Oculus hardware performance in service of this underlying mission of ‘connecting people’. This is a very strange way to approach a product highlight - you should be trying to placate the lowest-common denominator customer with superficial promises about high-fidelity graphics in the Metaverse; since that is what they seem to want most, whether it actually benefits the end-user or not. Clearly HQ is much more savvy at this since they are pursuing “nearly photorealistic codec avatars".
On one hand, this could be interpreted as Oculus doubling down on a mass-market strategy. On the other hand, saying something like this in the current business environment is pretty much committing political seppukku - you could say that this isn’t the most profitable way to approach marketing. People are veritably vitriolic about Avatar Zuckerberg.
However, if Carmack were actually coming from a very strong place somewhere else, then I could see him justifying such a position. I.e. he’s not necessarily trying to sell the maximum number of Oculus headsets; he’s actually trying to create a virtual space that a large number of people not only want to come to - but are even willing to stay in. For extended periods of time. And this would very much tie his objectives for the Metaverse project back to Facebook’s original mission of “Connecting People” - since in order to do that, you need to optimize resources even if it means making everyone in the Metaverse look like Avatar Zuckerberg.
Carmack also expresses his hesitation with the recently released high-performance Oculus Quest Pro - which has a whopping base retail price of $1,500. He basically describes it as detracting from the mission of getting Oculus hardware strapped onto the heads of as many people as possible. The following quote puts this into stark perspective:
His rallying cry, he says, is a target of "$250 and 250 grams" for a headset that cuts out as many extraneous features as possible while still being usable (the Quest Pro weighs 722 grams, while the Quest 2 is 503 grams). That could help bring "super light comforts" to "more people at low-end price points."
This again demonstrates how strongly he might feel about the mission of “Connecting People” - as opposed to simply trying to build some sort of profitable feel-good business. This was a very good interview, and I highly recommend reading the full article.
This other interview with Zuckerberg and Microsoft’s Satya Nadella with Ben Thompson of Stratechery last month lends itself to the same conclusion. Towards the end of the interview, Zuckerberg specifically and repeatedly mentions how they are approaching the Metaverse more from the social and consumer angle; rather than an enterprise angle. In the second-half of this interview (after Nadella leaves midway through), Zuckerberg provides extremely well fleshed-out answers to Ben’s questions about how the Metaverse will look like. Some of the topics discussed include:
The role of AR vs. VR vs. XR in the future of technology;
How much they’re willing to partner and relinquish control (i.e. walled garden vs. ecosystem);
The different lenses through which we should understand the Metaverse (e.g. single vs. multiplayer; play vs. work; parallels btw AR/phones and VR/PC)
How they plan to approach future risks in terms of Metaverse development and consumer adoption, and which tradeoffs should be made;
In this interview, Nadella highlights how they are
not only working with Meta as a software vendor to develop ‘Office for VR’; but also working on larger enterprise productivity apps - one of the examples given was two engineers discussing how to construct a jet engine while their board sits in and listens on the sidelines.
Meta has also managed to invite collaboration with a few other megacap tech partners such as Qualcomm - who they are apparently in the midst of building a VR-specific chip with. Zuckerberg mentioned how he himself was surprised that the Oculus Quest 2 sold 7x more units than the Oculus Quest 1 did - few people remember that it was barely 5 months ago that the Quest 2 had reportedly sold 15 million units - supposedly even outselling Microsoft’s Xbox console at the time. That doesn’t sound like a one-hit wonder to me; on the contrary, Zuckerberg himself claims that their partners only began expressing interest in collaborating with Meta once the Quest 2 numbers showed that VR wasn’t just a passing fad.
Anyway, the reason I went on this whole spiel is to demonstrate the parallels between Facebook’s original mission and how Carmack and Zuckerberg are describing their vision for the Metaverse. Rather than trying to build some sort of business enterprise that makes the most amount of money, it seems like they are focused on a much deeper mission of building bridges between people. This is not to say that being self-sufficient and profitable isn’t important - but it gives so much more context to what Meta’s vision for the Metaverse looks like.
Here’s what I mean. As I’ve mentioned earlier, I’d actually find myself agreeing with market consensus that this whole Metaverse thing sounds quite overhyped in the absence of this vision. Firstly, Zuckerberg himself says that this is a super long-term project which could take 10 years to bear fruit. Most stock market participants can’t wait 10 months, much less 10 years - so I can completely understand how it could come across as more hype than substance. Secondly, the Meta team completely botched the reveal of their Metaverse with those low-quality avatars - or at least, afforded the haters a chance to hate. A more marketing-savvy team might have went with a more cinematic CGI-heavy ad rather than only showing clips rendered from the in-game engine - the way many game companies do before they’re ready for prime time. And going by the news of Horizon Worlds being riddled by bugs and inefficiencies, they could have at least chosen to call it a ‘beta’ and spared themselves the poor first impressions. And then maybe keep it that way like how the space-sim game Star Citizen has done for the past 10 years.
To be fair, I can sort of understand how things got to the tragedy that it is today. It could very well be that Meta’s own developer team had advised management to keep Horizon Worlds under wraps until something more substantial could be shown to the public - but that the C-suite pushed the reveal of what was supposed to be a beta release through early, in the hopes of taking attention away from the plateauing growth of their FOA suite of apps and stem the share price decline. Or it could have simply been that they had prioritized on germinating the practical aspects of the Metaverse, rather than polishing the aesthetics of it - and then miserably failed to adequately communicate what the vision of the Metaverse was to the masses. Thus, what the Metaverse’s public image ended up becoming was an MMO version of The Sims with 1990’s graphics. This chain of unfortunate events is actually quite plausible; we’ve all made such mistakes before in our own jobs.
Thirdly, and perhaps most importantly, the Metaverse project remains nothing more than a concept in its current form. There is no visible path to legitimacy (much less profitability) from the present-day, in terms of fully realizing all its component ecosystems as detailed in Matthew Ball’s Metaverse Primer. It’s one thing to create a glorified VR meeting room - it’s another to attract the hundreds of thousands of participants required to enable the Metaverse to achieve economic critical mass. And if I feel this way, then certainly so do many others - and if Meta’s Metaverse fails to capture the world’s imagination and attract enough users, then it is exactly the fated bottomless money sink that its critics conjure it to be.
However, once we add in the aforementioned vision of ‘Connecting People’, it totally changes up the whole formula. We start to see where the Oculus team may have been coming from in their botched Metaverse reveal - perhaps they were so focused on the substance of the mission they were trying to achieve, that they didn’t consider how ugly it looked to the layman customer who still sees VR as a fancy way of playing video games. The fact is that Meta’s Horizon Worlds Metaverse does actually achieve many of its supposed goals of ‘connecting people’ - you can watch a movie in a VR cinema with your friends, get a meeting going with colleagues around a VR meeting room table, or even attend an Elton John VR concert with thousands of other participants - all from the comfort of your own bedroom. If Zoom allowed people to get facial cues from their overseas colleagues instead of dialing international, then Meta’s Metaverse enables true in-person level office productivity without the boundaries at a fraction of the cost - even in its current form. It doesn’t take a lot of processing power to watch a movie in a virtual cinema, throw up spreadsheets onto a virtual wall, or watch an Elton John livestream with decade-old technology. Nor does doing any of these things requires things to look ultra-pretty with high-fidelity graphics.
In fact, that’s what I think that’s what the aforementioned $1,500 high-performance Oculus Quest Pro was supposed to address. It has all the fancy thingamajigs built-in - this thing even has cameras and a smartphone-worthy chip installed in each handheld controller. The idea behind owning such an expensive piece of hardware is to allow all the CPU-intensive processing power required for AR/VR to be performed locally on the device itself - such that the amount of data that needs to be sent over the Internet to Meta’s HQ and processed by their cloud servers can be significantly reduced to give users a streamlined VR experience. When you multiply this kind of processing load by millions of Metaverse users, it quickly becomes apparent how each of them having expensive high-performance hardware can be justified to limit the amount of infrastructure resources required to run the entire Metaverse.
However, as I’ve also noted above, hardware with this kind of processing power is expensive. Not everyone who cares about the Metaverse necessarily wants to drop $1,500 for better graphics - much less those who don’t care. And as many tech reviewers rightly point out, not many people are going to bother shelling out for such a device - which means that it’s not designed to be commercially profitable. So what’s the objective of Meta releasing such a device?
If you do a little digging in the comments of this product review video, you’ll come across many comments by professional tech geeks that the Oculus Quest Pro resembles a dev kit much more than a final consumer product. That means that the Quest Pro could actually have been designed for developers rather than users - to put the power of such expensive technology in their hands and get them to develop high quality software for the Metaverse. If so, Meta could have released the top-of-the-line Oculus Quest Pro to get developers excited about what the Metaverse could potentially look like in the future with cheaper, more capable hardware - and get them to start building software for it years in advance of actual showtime.
As we all know, semiconductor performance improves on a log scale called Moore’s Law - where it basically doubles in performance approximately once every 2 years. This is the reason why the chip in your iPhone is more powerful than the one which powered the Apollo space shuttle which first sent men to the moon in 1969. In 10 years time, there’s a reasonable chance that we’ll see chip performance per watt skyrocket to the point where the expensive hardware currently found in the Oculus Quest Pro could become just as affordable as our old Nokia “dumbphones” - making such VR/AR devices that much more accessible to everyone, and therefore enabling the necessary economic critical mass in the Metaverse to be achieved.
Putting such affordable high-performance hardware in the hands of the masses would represent a huge leap for Meta once you understand what such processing power enables. Meta is already capable of producing what Carmack refers to in his interview above as “photorealistic codec avatars" in their labs. Searching on Youtube for that phrase yields the videos below:
Just imagine what the Metaverse could look like in the near-future if such photorealistic avatars were available to everyone in the Metaverse - instead of just a couple of developers in Meta’s labs. If I could see my colleagues’ faces in the Metaverse as realistically as the videos above seem to be promising, I could honestly see myself staying in the Metaverse for extended periods of time. Rather than socializing with lame polygon Avatar Zuckerberg as demonstrated in the initial Horizon Worlds reveal, we could actually be interacting in a parallel world approaching complete realism that blurs the lines between ‘real’ and ‘virtual’ - if we could actually recognize each others’ faces in the Metaverse in a frictionless manner. Honestly, watching the concept videos above took my breath away.
The problem with realizing this vision is that enabling such high-level performance requires everyone to own extremely high-level equipment to realize. At today’s processor speeds, such high-performance hardware would be prohibitively expensive - as we can see with the $1,500 Oculus Quest Pro. But perhaps in 10 years time, we could see VR hardware with 10x the processing power of the Oculus Quest Pro today at 10% of the current price (e.g. “Vision 10-10-10”). This would allow the masses to roam the Metaverse in their photorealistic codec avatars - perhaps even with sleek-looking Google Lens-esque glasses outside the confines of their homes or offices, once 5G becomes widespread by then. Maybe by 2050, the Metaverse could even look something like it was portrayed as in the hit sci-fi movie Ready Player One:
The point I’m trying to make is that, as far as I understand, the Metaverse isn’t about building some sort of money-printing enterprise. It appears to be about genuinely achieving its social mission of “Connecting People” - of enabling Facebook’s original mission of “giving people the power to build community and bring the world closer together”.
In that sense, Meta’s Metaverse is simply a philosophical extension of Facebook but in a different form - which is ultimately trying to achieve the same goal of bringing people closer, and making the world a smaller place. With that as context, we can imagine what the future trajectory of Meta’s ambitions for the world writ large could look like - and extrapolate from where they are today to determine for ourselves how much that could be worth. We all know how successful Facebook has been over the past decade - which the financially-savvy Eduardo Saverin apparently didn’t when he insisted on plastering Facebook with ads as depicted in the movie The Social Network.
The thing is that if you tried to sell Metaverse to me as some sort of business where Meta could generate a financial ROI, I probably wouldn’t know where to begin estimating their valuation. But if their underlying mission is to truly create a better world with deeper connectivity for everyone with technology - then yeah, I could believe them trying to make that happen. What form that Metaverse might eventually take is anyone’s guess - but if we understand the principle of their goal, it makes imagining how it could look like and estimating its future value that much easier.
If Zuckerberg and his Oculus team truly mean to take human civilization to the next level, with the potential economies of scale & network effect scalability that can be found in a purely virtual globe with face-to-face level interactivity - that’s a much grander vision than just trying to make a trillion bucks or two. For all the merits of business, the two most powerful factors in enterprise success happen to be Purpose and Passion - and a team which possesses both and who truly believe in the altruistic vision of what they are doing are going to have 1,000x the grit and determination to see their vision through - as compared to say a bunch of guys who are just trying to exit at their upcoming IPO. It’s the difference between a venture capitalist, and a presidential candidate who desires to become President so that they can execute their own interpretation of what a better country means for their people.
And if there was a company which could actually see this type of 10-year long vision through, it would be one of the megacap Tech companies like Meta (is FAANG still a thing?). Executing on a 10-year long ambition on such a grand scale would require a practically unlimited level of commitment in terms of resource and capital allocation - but luckily, Zuckerberg has just that at his disposal.
Firstly, he has approximately $50B of annual FCF to pour into Metaverse CAPEX - of which some would go into expanding the AI capabilities of their FOA suite of apps to further increase present-day FCF reinvestment capacity. I’m not going to pretend that I understand all the nitty gritty details about the technology requirements of the Metaverse - but what little I do understand implies that this is the type of problem that can be solved by throwing money at the problem. It’s not like developing EUV where you kinda need a little bit of luck on your side to discover the solution - if you have the staying power and financial flexibility to reinvest practically unlimited amounts of capital at low ROIC at the dream, it is actually possible to create the Metaverse through sheer willpower just by buying up enough technology, hiring enough talent, and doing enough sales & marketing.
And if it’s successful, all bets are off on the potential ROI of this venture. With Zuckerberg’s supervoting shares, he’s probably the only CEO in the world who can ignore the whims of short-term speculators of his stock long enough to see such a long-term vision to the end. At first glance at least, it does appear like this team is committed to realizing the Metaverse. I mean, they literally rebranded the entire centi-billion dollar company’s name to Meta.
Valuation
To be clear, I’m not trying to say that Meta will end up monopolizing the Metaverse. As I’ve alluded to earlier, the Metaverse doesn’t belong to just one company - it is basically the entire virtual universe that will inherit the will of the present-day Internet, and will likely involve every single megacap Tech company out there. Many of them have already begun staking their claim on the Metaverse - including the likes of Nvidia, Microsoft, Google and Qualcomm.
However, the context of justifying a Meta investment today has nothing to do with their future ability to outperform - but rather today’s woeful undervaluation inherent in their share price. Meta shares currently trade a trailing PE of 8.5x - and as we’ve noted above, even if their FOA suite of apps plateaus into perpetuity, they will still be printing money at at least half of their current rate.
Let’s assume that the Metaverse project fails utterly and completely - and account for that by adding $100B to their current market cap. If so, the adjusted “post-fail” market cap of Meta would be in the region of $335B - which implies a share price of $127, and a trailing PE of 12x. Even if we double that to 24x trailing PE to account for FOA earnings halving from today, that’s still well within normal multiples for GDP+ growth incumbents in other sectors.
If this worst-case valuation of 24x PE is considered acceptable, that implies that anything in excess of that resulting from a successfully executed Metaverse is pure profit. As we’ve discussed above, the potential long-term returns from such an upside scenario could easily match their current valuation - no, perhaps even triple or quadruple it. This means that over a 10 year investment horizon, we’re talking about an 11% CAGR if it triples; or a 15% CAGR if it quadruples. And that’s just the start - a successfully executed Metaverse would throw off a brand new stream of FCF, and investors are likely to price that into the future multiple.
I understand that this all seems like a lot of hype - but recall that it was just a year or two ago that these kind of narratives were prevalent amidst mainstream investor sentiment. Moreover, we’re not even counting on the Metaverse project to succeed - all I’m saying is that there exists ginormous asymmetric risk:reward here. Could Meta’s share price continue to fall from here? Yes. Would I care? Not really, not at these valuations. I just don’t see this company imploding, short of a Black Swan level threat appearing out of thin air.
More importantly, it seems that Meta’s team actually has altruistic intentions for their attempt at the Metaverse. If so, it’s not too difficult to imagine them getting the requisite buy-in from enough customers one day who also share in their vision - the equivalent narrative could be written for climate change today. There is already a substantial VR community who are true believers, and would serve as ready evangelizers for the Gospel of the Metaverse. As we’ve observed above, the main hurdles to realizing their version of the Metaverse is technology and cost - both of which are surmountable challenges for a tech-Godzilla the size of present-day Meta. And if they manage to follow through on their absolutely fascinating technological promises, they’d certainly get my vote of approval.
Of course, there is an alternate universe where the Metaverse just doesn’t get enough buy-in from consumers for some dumb reason or another. Tech consumers are a fickle bunch - which is why the growth strategy at the Tech Megacap level tends to be ‘throw as many things at the wall and see what sticks’. If so, then at least we’ve covered our downside with the worst-case 24x PE scenario as discussed above.
However, a pragmatist would also argue that the days of unlimited earnings growth from Meta’s FOA suite of apps are over - and that Zuckerberg is only doing the logical thing by pivoting heavily into building a new complement while there is still time. The alternative would be for him to sit on his laurels, and enter a state of denial about the inevitable flatlining of his FOA businesses in an industry characterized by shifting sands. And eventually waste away into the annals of recent tech history like Nokia and Blackberry have when they failed to reinvent themselves, and simply doubled down on their disrupted businesses. Whether you think Zuckerberg is a has-been or a visionary is really just a matter of perspective; remember, he acquired Instagram for $1B and Whatsapp for $16B.
By the way, this article isn’t meant to drive a conclusive narrative about what the correct answer to Meta’s future is. Rather, it is merely intended to provide an alternate point of view - which I’m just not hearing very much out there in the ether. Also Mark, I apologize that this writeup somehow stopped being an open letter about halfway through. Wishing you and your team all the best.
Godspeed,
A recent Meta Shareholder at 24x PE
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