Can Meta Keep Growing?
It has been a gloomy few months in otherwise Sunny Silicon Valley. Market leaders like Meta, Google and Twitter have all announced layoffs, Venture Capital has been drying up and Silicon Valley Bank recently collapsed after failing to raise new capital. Despite these trying times, investors still have strong confidence that companies like Meta and Amazon are still likely to show secular growth. A quick search through leading publications like CNBC, Forbes and Yahoo all seem to yield the same conclusion – Tech Stocks are driven by secular growth stories. This in turn begs the question – is the tech sector still a haven for secular growth.
So, the first question is, what sets apart the growth secular growers from the rest? Secular growth stocks refer to stocks that grow irrespective of macroeconomic headwinds. This in contrast to cyclical stocks that move with the macroeconomy – and by extension have a stronger exposure to market risk. (Source: Investopedia)
The tech sector is quite diverse in the companies it encompasses and how they move with the market. Airbnb ,for example, might move strongly with other hospitality companies. AMD – which develops microprocessors – has a variety of clients from Consumer Tech companies to major business clients like AWS and is not as strongly tied to one industry. Meta Platforms (the parent company of Facebook) is perhaps a perfect example of the archetypal tech firm. The story goes as follows:
Meta’s valuation story is one that is somewhat typical for many platform focused tech companies. One of the main drivers of valuation is traditionally cash flows – i.e. the money a business brings in. In Meta’s early days, however, value was driven by predictions of future growth rather than current cash flows. Meta’s original funding was largely driven by growth in user numbers – which investors saw as a gateway to future cash flows. (Source)
Fast forward to 2007 when Facebook launched its advertising platform – what has now become its main driver of growth. Armed with mountains of user data, Facebook was able to collect what has now turned out to be its largest source of cash inflows. What followed was the firm turning its first profit in 2009 and eventually becoming one of the most valuable companies in the world. (Source)
Meta exemplifies the idea that tech can have secular growth. For a significant part of the firm’s history, analysts have argued that Meta is a strong candidate for long term investment. In theory this narrative made sense. As a platform-based company, Meta was able to build a significant competitive “moat” by buying up and coming competitors and refining its own algorithm. Given the inherent concentration that comes with having a platform, this competitive moat in term meant stable long term cash-flows. Meta had the archetypal platform business – exponential value growth with linear cost growth.
The recent layoffs however, provided something of a more complicated picture of Facebook’s golden goose. The prevailing narrative has been that these layoffs have been prompted by – (1) a mix of heavy investments in the metaverse that have not paid off and (2) a decline in ad revenue. Both point to some broader ways in which the Tech industry ties in with the macroeconomy.
In the case of new consumer tech products like metaverse headsets, the tie in is straightforward. In times of economic downturn, consumers are less likely to spend on new consumer electronics. Furthermore, cost of input increases that hit other sectors of the economy might also drive up the cost of these products. Both on cost and revenue side, these factors increase the company’s exposure to macroeconomic fluctuations.
The second tie-in is a little more subtle. In the case of Advertising revenue, the firm is at the behest of its corporate clients. If business confidence is low, advertisers are likely to scale back their budgets – lowering the firm’s revenue. This in turn creates a second avenue of exposure through business spending – further making Meta susceptible to economic headwinds.
Even in times of expansion, the platform tech company is not immune to threats to its cash flows. The sudden upswell of TikTok, for example, is arguably siphoning away advertising dollars away from Meta. Moreover, the pressure to build better algorithms (to collect more consumer data) in turn also raises the cost side of the tech industry.
Notwithstanding these direct threats to revenue, there are also non-economic factors that arguably threaten to dent the “Golden Goose” story of Meta. Data collection and privacy concerns have become increasingly salient. iPhone users – a large subset of whom also use Meta Platforms – can now opt to not have apps track their behavior. Such ethical and potentially regulatory pressures also threaten Meta’s future prospects.Yet, even in this present moment, as the company recoils and such doubts persist, Wall Street is still batting for Meta’s secular growth story. Many cite new research and development into the Metaverse and new technologies as a huge driver behind this optimism. (Source) It is in the face of this continued optimism that one must advise caution. While it is true that Meta’s businesses do not tie in with the economy in the same way as banks do, it is not completely immune to the wrath of the macroeconomy.
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