Meta Platforms Is Being Dragged Down by Key Flaws in Its Metaverse Plan
The fall of Meta Platforms (NASDAQ:FB) stock illustrates an important point about today’s market. Founders have the power to build, but they also have the power to destroy. FB stock is no different, as its top-heavy power structure puts it at risk of missing opportunities it desperately needs for its metaverse plans.
As Facebook, Meta’s huge investments in cloud infrastructure made it a trillion-dollar behemoth. Now, with the name changed and CEO Mark Zuckerberg’s new metaverse vision in place, that value has been cut in half. Meta was trading at $188.50 per share on March 15, a market capitalization of $516 billion. That’s about 13 times last year’s net income of nearly $40 billion.
Meta has become a cheap stock by almost any measure. It’s now trading more like JPMorgan Chase (NYSE:JPM) than a tech stock. Investors don’t seem to believe in the company’s vision, but it shows no signs of changing its approach to the metaverse.
FB Stock’s Metaverse Dreams in Peril
The December quarter saw net income of $10.3 billion, down $500 million from a year earlier. It was considered a disaster on the Street. So far, March looks to be worse. The company is already cancelling employee perks like a free laundry service. Median compensation at the company is nearly $150,000.
Additionally, the Russian invasion of Ukraine is just the latest in a series of unfortunate events that have hurt social media. Bank of America (NYSE:BAC) says the war is going to make it hard for FB stock to recover lost ground.
What started the stock falling was the company’s move to put $10 billion per year into the metaverse, a software stack supporting virtual and augmented reality. The spending was exorbitant and cut into its profit, and it’s expected to continue for several years.
Critics like former Nintendo of America (OTCMKTS:NTDOY) president Reggie Fils-Aime are now openly dismissive. Meta’s 20 million VR headsets sold to date would be a single-year figure at Nintendo, he claimed.
The cash flow needed for the metaverse investment is also under new threats from regulators and the market. ByteDance’s TikTok and even Snap (NYSE:SNAP) have more cachet among young users.
The Road Not Taken
There is a way out of this. Meta could rent space in its 15 hyperscale data centers to other companies. As I have written, it is hardware, not software, that made Facebook a Cloud Czar.
Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) all bring in billions of dollars renting out cloud capacity. Apple (NASDAQ:AAPL) gets billions directly from users by renting cloud space.
Meta has never done this. The only services that run on its hardware are Meta services. If the company was willing to rent space, it could bring in the cash flow necessary to make its metaverse plans affordable.
It won’t. There’s also nothing investors can do to force the issue, because super-voting shares give Zuckerberg absolute control of the company. If that power were taken away and that influence were given to other parties, Meta could be in play.
The Bottom Line on FB Stock
It’s clear that investors no longer believe in Meta’s vision as spearheaded by Mark Zuckerberg.
Some people believe Facebook innovated the social network. It didn’t. The company’s great innovation was the Open Compute Project, which cut the costs of cloud services and made it affordable using cash flow.
If the company built smaller data centers nearer users to reduce latency, Meta could rent capacity for cloud gaming, restart growth and make the metaverse affordable. Unfortunately, unless it changes course or updates its leadership structure, the company might not recover soon enough.
On the date of publication, Dana Blankenhorn held long positions in MSFT, AMZN, BAC, AAPL and GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
