A social media giant with a long glide path of global growth
We've been publishing investment theses at Weitz for over a
decade. Having penned several over the years — even ahead of its recent earnings
report — it was apparent that writing about Meta Platforms (formerly known as Facebook)
was going to be a unique proposition. Alternatively hated and loved, we began
with an already fraught topic. Throw in an earnings report that resulted in the
largest one-day market value decline (over $235 billion) of any stock in
history, and we are left with an amount of theater to which even this slightly
grizzled writer is unaccustomed.
Meta Platforms’ one-day market value decline was of an amount greater than the total valuation of most public companies.
We don't need to devote much time to Meta's history. The
story of Facebook founder Mark Zuckerberg coding away in his Harvard dorm room is,
by now, the stuff of legend. Meta is the owner of some of the best-known brands
on Earth, but the scale of its services can be difficult to grasp. We are
approaching eight billion souls on this planet, and nearly half of them use at
least one of Meta's services monthly. Over a third of the globe uses at least
one of Meta's services daily. And despite lapping a 2020 that benefitted
from strong, COVID-driven user engagement, that number of daily users still
grew at a double-digit pace in 2021.
Over the years, Meta has acquired dozens of companies, most
of which wouldn't be considered household names. There are five businesses that
will likely matter to Meta owners over the next many years. They include
Facebook — the social media colossus; WhatsApp — the global text and voice
messaging service; Messenger — Facebook's homegrown instant messaging
application; and Instagram — the photo and video sharing platform. The fifth
business, Reality Labs, houses Meta's augmented reality (AR) and virtual
reality (VR) efforts, including Oculus, the largest seller of VR headsets. Per App Annie's State of Mobile 2022 report, Facebook,
WhatsApp, Messenger and Instagram — in that order - occupy the first four spots
on the list of largest global mobile apps by number of active monthly users.
Meta does not disclose user statistics for most of its
messaging and media businesses, nor do they break out revenues amongst them.
Meta's total 2021 revenues came in at $118 billion, up 37% from 2020. Reality
Labs, for now at least, contributes an ignorable portion of that, and we have seen
estimates that put WhatsApp and Messenger in the $5-10 billion revenue range. All
those businesses are growing quickly, though they are unlikely to be
meaningfully positive contributors to earnings in the near term. This leaves perhaps
90% of Meta's revenues contributed by Facebook and Instagram, and virtually all
of that revenue is from advertising. Market research firm eMarketer estimates
that Instagram's U.S.-sourced revenues finally surpassed those of Facebook as
of late 2021. Instagram has doubled its global user base to two billion over
the past 3+ years.
Meta does not disclose operating income by service either,
but Facebook's earnings have clearly subsidized the growth of Meta's acquired
businesses over the years. The company bought Instagram in 2012, but it was not
until 2015 that its audience was made widely available to advertisers. WhatsApp
and Oculus were both acquired in 2014 and little, if any, financial
contribution has yet been asked of either. In fact, Meta
recently disclosed a $10 billion operating loss for Reality Labs in 2021. Our
simple takeaway from this investment behavior is that the founder-led Meta is
willing to invest substantial sums, for extended periods, to nurture the seeds
it sows. In total, that approach has created great financial value, and we
believe it will continue.
Prior to its recent earnings release,
Meta's stock had already weakened, having underperformed the Russell 1000 by around
15% since mid-September 2021. The impetus for that initial decline was the
release of thousands of internal Meta documents by a former employee whistleblower.
While connecting billions of people around the world has surfaced staggering
examples of beauty, kindness, creativity, and humor, parts of Meta's social
networks have also become beds of vitriol and misinformation. Every aggregation
of humans at this scale will, without exception, produce both good and bad.
What — if anything — to do about that is the question for our times. The fact
that answers to that question would vary so widely is a testament to both our collective
diversity and the intractability of the problems we create for ourselves. The
issues highlighted by the release of those documents are — and had already been
— important and deserve a deeper discussion than these few pages permit. In the
interest of brevity, we will say this: the services Meta provides to half the
globe will — one way or the other — be made to better align with the mores of
the societies they serve.
We believe Meta is trying. If Mark Zuckerberg could snap his
fingers and create perfect filters for hate and depravity, we believe he would
do so in an instant — whether financially or morally motivated. This does not
mean that Meta has tuned its content algorithms ideally (though, to whose
ideal?) or has sufficiently invested in safety measures (though, to whose
standards?). So, we are thankful for the whistleblowers, journalists and
elected officials who work to shine a light on the deficiencies of powerful
companies. One may even choose to own this business both despite and because of
the course corrections it will be required to make in the future. We believe
that over the past several years the direction of travel of Meta's alignment
with societal aims has been positive, and it will likely continue that
believe that over the past several years the direction of travel of Meta's
alignment with societal aims has been positive, and it will likely continue
From November of 2021, Meta's stock
loosely tracked with the broader market until opening a -30% gap since
reporting earnings in early February of 2022. While the large operating
losses at Reality Labs are controversial, Meta's weak first quarter 2022
revenue guidance was likely the dominant driver of that decline and can be
attributed to several causes. The least compelling of these are either cyclical
or expected. Management noted potential advertising weakness in response to economic
headwinds, such as supply chain disruptions, labor and inflationary pressures.
Such wobbles come and go and seem unlikely to have much bearing on where the business
— and the value the business commands — lands in several years.
From the third to the fourth quarter of 2021, global daily
Facebook users marginally declined, the first decrease in the company's history.
Given the maturity, scale, and penetration of the network — and the fact that
we are lapping a period of heightened, COVID-driven global engagement with all
things digital — it neither surprises nor disturbs us that users finally ticked
lower. In all but the most improbable scenarios, whether or not Meta works as an
investment will depend very little upon quarter-to-quarter changes in the
number of daily Facebook app users.
Deserving of more of our attention are Apple's privacy
changes, the rise of short-form video app TikTok, and Meta's responses to each.
In 2021, Apple unveiled new privacy features for the iPhone that have taken a
bite out of Meta's revenue. Meta has long ingested an immense amount of data
from third-party sources. Combined with the extensive browsing and shopping
behavior on its owned properties, Meta had been left with the ability to not
only serve very productive ads to its users, but also demonstrate the productivity
of those ads to advertisers. Apple's privacy changes required iPhone users to “opt
in” to the sharing of their data between apps, and relatively few have done so.
These changes, feathered into Apple's user base over the
past year, have increasingly garbled Meta's “signal,” impeding its ability to
attribute consumer transactions to the advertising that drove them. The impact of
the changes likely approached full strength in the back half of 2021, and the
efficacy of Meta's efforts to reclaim some of that lost ground should continue
to improve with time. It seems likely, then, that we are past the worst of the
Apple headwind, and Meta's unimpacted growth rate can begin to shine through in
the back half of 2022.
Finally, and likely most importantly,
there is the meteoric rise of TikTok, App Annie's most downloaded app in the
world for 2021.
Per social media management platform HootSuite, over the past few years,
TikTok has risen from relative obscurity to the fifth-largest social media app
in the world, ranked in order of total time spent by users. While TikTok,
Facebook and Instagram users wouldn't say the apps serve the same purpose, they
all do compete for a finite amount of user attention, especially attention
devoted to users' mobile phones.
While both Instagram and Facebook still rank ahead of TikTok
based on total time spent, TikTok is on a trajectory to close the gap, and it
is large enough to demand a defensive response from Meta. That response came in
the form of Meta's copycat short-form video service, Reels. Instagram began piloting
the service in Brazil in late 2019 and rolled it out more broadly in mid-2020. Instagram
launched Reels in India shortly after the China-based TikTok was banned, and a
month later in 50 other countries. Reels wasn't launched on Facebook in the U.S.
until September of 2021. On the February 2022 earnings call, Zuckerberg called
Reels “our fastest-growing content format by far” and “already the biggest
contributor to engagement growth on Instagram.”
To attract users to the Reels format and keep them coming
back, Meta has, for the time being, kept the volume of ads one sees while
consuming video to a minimum. Any mix shift of user activity from higher
revenue generating — such as Feed and Stories — to low will dent revenue growth
until Reels can manage to offset the revenues it has displaced elsewhere in
Longer term, this transition to video feels to us like an
opportunity. Yes, it has and will continue to result in some amount of short-term
pain as Meta invests to grow video consumption. And we agree that the shift is,
at its core, defensive in nature. But Meta brings some advantages to the table,
notably its already massive user base. Although marginally diminished by Apple's
changes, Meta is still one of the most adept in the world at matching consumers
with advertising they actually want to see and with merchants with whom they
actually want to transact. That is powerful, it earns them staggering amounts
of revenue and that revenue results in a potent means of rewarding and
motivating content creators. We are excited to see all these capabilities
brought to bear in short-form video over the coming years.
The future is certainly not without risk for Meta, and that's
how one gets a stock down over 40% from its highs. Longer term, Meta needs to adapt,
continue to engage users, and again improve its performance for small and large
advertisers. If Apple's changes create headwinds that only increase in the
future, the capital we have devoted to Meta will have been better aimed
elsewhere. If TikTok — or other competing uses of mobile time spent — continue
to grow in appeal relative to Meta's apps, the same will be true.
"Meta’s willingness to invest at scale – to endure some lean years in support of a better, higher future – is a large measure of its appeal to us."
In the nearer term, the path of Meta's earnings will most
likely be determined by the level of Meta's own aggression; the more they
hasten the growth of video consumption, the more earnings will be negatively
impacted. We can imagine an unusually wide range of earnings for 2022, and that
is off-putting for many investors. In retrospect, our position sizes may ultimately prove to
have been too large heading into the quarterly update and we could have been
more respectful of the likelihood of an earnings reset. But Meta's willingness
to invest at scale — to endure some lean years in support of a better, higher
future — is a large measure of its appeal to us. From today's price levels, we
think the stock has ample potential for excess returns over our investment
Past performance is not a guarantee of future results. All investments involve risks, including possible loss of principal.
As of 12/31/2021, the following portfolio company constituted a portion of the net assets of Balanced Fund, Hickory Fund, Partners III Opportunity Fund, Partners Value Fund, and Value Fund as follows:
- Apple, Inc. (AAPL): 0.0%, 0.0%, 0.0%, 0.0%, and 0.0%.
- Meta Platforms, Inc. (FB): 0.0%, 0.0%, 5.5%, 3.4%, and 4.8%.
Holdings are subject to change and may not be representative of the Fund's current or future investments.
The opinions expressed are those of Weitz Investment Management and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through the publication date, they are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor's specific objectives, financial needs, risk tolerance and time horizon.