Meta’s Mega-Meltdown and Other Big News From the Metaverse

February 11, 2022

In last week’s issue, we took a slightly deeper dive into what I believe will be one of the top investment trends in 2022 — the metaverse… That virtual world where people can socialize, work, and play. 

If you want all the details, you can read the issue here.

There’s no question in my mind that this will be the future of the internet. Mark Zuckerberg went so far as to rename his company to announce that was the direction they were headed.

It’s an early stage investment to be sure. As I emphasized in the issue, “as with any new idea, it’s nearly impossible to know how it’ll evolve and mature over time.”

But that doesn’t mean that you want to ignore it. You don’t want to wait five or six or seven years to see what happens. This is where the next generation of Apples and Googles will come from. And now is the time to start looking for them.

Of course, like picking Apple and Google out of a sea of tech stocks in the 90s, investing in it won’t be like shooting fish in a barrel.

The uncertainty that comes with disruptive technology always poses risks to investors as well as the companies that play in the field. 

That risk reared its ugly head last week and took a swipe at Zuckerberg.

How Fast Can You Lose $232 Billion?

On Thursday February 3, Meta Platforms (Zuck’s renamed tech giant) announced its earnings — or earnings miss to be more exact — and tanked some 26.4% in the blink of an eye. In that same blink, some $232 billion of market capitalization was erased from the company.

Meta Platforms (FB)

Source: Barchart.com

That collapse was apparently a record for any single stock. (Of course, most companies don’t have $232 billion in market cap to give up.)  

There are a couple things investors need to understand about this blow out.

First, the thing that makes growth companies so attractive is their growth potential. Not necessarily the absolute revenue numbers they put up. But rather their ability to grow those numbers consistently quarter over quarter. (Even if they don’t have earnings.) 

And as a growth company, when you eventually go from a fast-growing company to a less-than-fast-growing company, you’re always going to take a hit. 

And despite its mega-cap status, Meta is still considered a growth stock.

But if you miss a revenue estimate or worse, lower your forward guidance, the hammer is coming down.

Meta cut its 2022 first-quarter revenue projection to the range of $27 billion to $29 billion, compared to Wall Street’s expectations of $30.15 billion.

Boom.

The second thing you need to consider, and my wife hates it when I say this because she’s a big Facebook user, Facebook is becoming an old persons’ platform. 

When it first launched, it had a virtual monopoly on the 18 to 20-something demographic. Today many younger social media users are favoring other platforms like Tik Tok and Snapchat. It’s not at critical mass yet, but it is a trend. And losing market share is never good for a company’s growth either. 

A third piece in this puzzle is actually another mega-cap tech company — Apple. 

A year ago, Apple implemented an “Ask to Track” feature in their iOS 15. All the apps that ran on their platform had to ask permission to track their users across other apps.

Turns out people value their privacy. Roughly 84% of Apple users started saying “No!”

This, in turn, took away Meta’s (and other platforms’) ability to serve targeted ads to their users. This was a massive hit to companies who rely on ad income. Estimates are that it cost Meta some $10 billion over the last two years.

All this was bad enough for them, but the final nail in their coffin was the metaverse.

In their quest to dominate the metaverse, the company spent approximately $10 billion in 2021 alone. And the spending isn’t finished. Zuckerberg has been up front about the huge capital investment that developing this new technology will require. 

And that creates massive risk where investors are concerned. Is Meta headed in the right direction building assets for the future, or are they just burning through money?

So Meta’s in the penalty box for the moment. They have some questions to answer and some confidence to rebuild. 

But while they may have stumbled, it doesn’t mean a thing where the metaverse at large is concerned. In fact, another mega-cap player just threw its hat into the metaverse ring.

The Competition is Heating Up

Two weeks prior to Meta’s meltdown, Microsoft announced its intention to gear up for the metaverse by whipping out its checkbook and acquiring video game maker Activision Blizzard Inc. for a whopping $68.7 billion. 

The technosphere was all abuzz about the news.

Not only for the sheer size of the purchase, but because it signaled how seriously Microsoft is taking the metaverse. How do we know that?

Because gaming has been at the forefront of the evolution of technology since day one. If you’re old enough, you might remember an addictive little game called Pong — two dashes that slid up and down on either side of your screen and a dot that bounced back and forth between them. 

Believe it or not, that simple package of code was what set the foundations of the games we have today. It was the great-grandfather of projects like Call of Duty (war games), FIFA 20 (a soccer simulation), Forge of Empires (a strategy game) and a laundry list of others.

Activision writes the code that creates the visuals (the environments and avatars) for the games you or your kids play. But that code can also be modified and used to create any number of online experiences. 

So by buying Activision,  Microsoft was basically jumping to the front of the metaverse line.

A Very Exciting Time For Investors

Think back 30 years or so (if you’re old enough to think back 30 years) when connecting computers to a worldwide network over your phone line was a mind blowing experience for most people. 

Back then, could you have foreseen where we’d be today. Each one of us with a mini supercomputer in our pockets? A tool so essential in our lives we never leave home without it?

Today what we take for granted was pretty much unimaginable 30 years ago. It’s going to be the same thing with the metaverse. 

No one can say with certainty where technology will be in another 30 years. Will you be able to sit and chat over coffee with your sister who lives 10 states away. Absolutely. Will you be able to sit in a virtual office with your doctor and get a physical examination with medical technology that’s connected to the net? Online MRI anyone?  Who knows.

My point is the train is leaving the station, and investors who want to capitalize on it need to get on board…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Confidential