Meta has realized ‘it doesn’t control its destiny,’ analyst says

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

Video Transcript

[AUDIO LOGO]

AKIKO FUJITA: OK, let's keep the conversation going around Meta. We've got Laura Martin, Needham Senior Media and Internet Analyst. Laura, you know, we-- Ines and I are talking about what we heard on the call yesterday. We didn't even touch on the digital ads part of it, Reels certainly one that Facebook, Meta has made a big bet on. They said they haven't been able to monetize it in a big way. But that was interesting in your notes-- you said there was a deafening silence of this historical ad business that has been the big revenue driver over the years.

LAURA MARTIN: Yeah, I thought the most interesting takeaway was the silence. And I thought the best question on the big call that everybody could hear was everything you're talking about is new. This all sounds very experimental. Why isn't it experimental to you? And what about the old business?

And I think-- and I think Mark's answer was, like, either he's not focused on the old business, or he doesn't think there's a future in the old business. But nothing they spoke about yesterday actually is the business that today is worth $300 billion market cap and used to be worth $700 billion market cap. It's almost like he's walked away from the core business that is making-- historically has made all the money. I thought that was the most interesting thing from the call.

INES FERRE: And, Laura, I mean, when you're talking about walking away from the core business, I mean, should he be focusing on Facebook? Is this what investors want? They don't want this sort of experimental into the future, and especially during a time like this. Do you think timing has something to do with this?

LAURA MARTIN: I mean, I thought your point was fair that the market right now wants current cash flow. It wants to bring lower risk, so it wants cash-on-cash returns. I'm just-- I think the way I read his choices is he's worried there isn't a core business unless he can stymie TikTok, like that he's worried TikTok is going to take away all of his content creators and his audience.

And like Myspace, when, you may recall, Facebook took all of Myspace's value away, it sounds to me like he's worried TikTok is going to take all of his value away unless Reels works, which is his knockoff of TikTok. So it just feels to me like this is a business at Facebook, where every 10 years Snap comes along, and he has to copy it or die. TikTok comes along and has to copy it or die. One of these days, you won't be successful copying the hot new thing. And I just wonder if there's actually a business here that is defendable.

AKIKO FUJITA: Yeah, I mean, Laura, to that point, we were talking about the tough environment Meta's already dealing with in terms of regulation. We know what the track record is with these acquisitions, whether it is an acquisition or taking an idea from another company. When you look at where they want to go with the metaverse, I mean, how convinced are you that the innovation internally is there to make this even if it's long term a viable business?

LAURA MARTIN: Look, I think Facebook has realized-- or Meta now realized that it doesn't control its destiny. It doesn't own its content because content creators are leaving it right now to go create content on TikTok and taking their fandoms with them. And it doesn't own its distribution platform because it's sitting on Apple, and Apple is capricious and arbitrary about changing its rules. And Apple doesn't really care if its rules hurt Meta.

So I think Meta's answer to that is to let's create a new computing platform like AR, VR glasses where we are the platform background, we charge everyone else 30%, and we change our rules capricious and arbitrarily and hurt apps on our platform. I think that's their play there. I think this really stepped up when Apple started making privacy changes in the fourth quarter of 2021.

So I think he's realized, like a lot of apps have, that so long as Apple or Android control the policies on their platform and they are answering to regulatory fears on their end that-- and no app is safe. No app controls its destiny. So his play with the metaverse is to actually own the hardware that is the platform that consumers use so he can charge 30% and change rules.

AKIKO FUJITA: So with that said, Laura, what do you-- what do you value this company at? Is it about the future play, is it a metaverse play? Or is it still a social media company that just hasn't been able to compete in increasingly crowded environment?

LAURA MARTIN: I would say the latter, that I think it's hard to value because it's unclear there is a core business here if they can't successfully replicate TikTok with 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 really is worrisome.

And then the metaverse, you have to put a value-- in order to value this company, you must 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 out it's not going to work? So I think that's the issue with value in this company now. It's hard to value the core business in a network effects business that's going the wrong way.

And it's hard to value what the metaverse will be worth because at the earliest, he's saying it's going to be worth something in 2030, which feels like a long way off for investors. So I think investors are doing the right thing today by using their liquidity and exiting the shares until it is clear what the value of either the core business is or the value of those metaverse investments are, both of which are really hard to value today.

AKIKO FUJITA: Yeah, certainly a steep fall from yesterday when you look at where the stock is down right now. Laura, always good to get your insight. Laura Martin, Needham Internet Analyst there.