Meta Platforms – Give and take

Zuckerberg giveth and he taketh away.

• Meta Platforms is giving to its investors with further job cuts likely but at the same time taking it away by cutting the price of its VR units ensuring that more units ship and higher losses are incurred.
• It looks very likely that another round of job cuts is coming at Meta Platforms and against the backdrop of what Twitter has been able to achieve, Meta has a lot of opportunities to make cuts.
• The Twitter service is still up and running despite massive job cuts demonstrating the possibility that the likes of Meta Platforms, Snap and even Google are substantially overstaffed.
• There are anecdotal reports of increased outages and inconsistencies with the performance of the platform but, as of yet, no hard data has been produced.
• Given the scale of the headcount reduction even if Twitter’s performance has degraded somewhat, it is clear that social media should be far more profitable than many of its participants are reporting.
• This is why I have been of the opinion for some time that Meta Platforms has space to make substantial cuts to its headcount without meaningfully degrading the service that it offers.
• Mark Zuckerberg has already trimmed a small slice of the fat but has now decided that he is going to take a small piece more in order to keep the market happy.
• The problem is that he has also decided to cut prices on his VR headsets as a result of flagging sales.
• Until Q3 2022, the Meta Quest 2 was selling roughly 1m units per quarter but this cratered when a price increase of $100 (33%) was put through in July of 2022.
• Meta has effectively been buying market share since the launch of the Quest 2 and I suspect that it has been losing more than $200 for every device shipped.
• This combined with the fact that the Quest 2 is a good product and is relatively fun to use for short periods has led to it becoming the standard for VR gaming and the only place where developers are able to make any money.
• This will be crucial in the war to dominate the platform of the Metaverse which is why I suspect, Mr Zuckerberg has decided to decrease the price once again.
• The Meta Quest Pro has been reduced by $500 (33%) to $999 while the Quest 2 is back to somewhere (depending on specification) around $400.
• If volume returns to around 1m per month, this will increase the losses at Reality Labs by anything up to $800m per year.
• Hence, I suspect that the savings from this increased round of cuts will be consumed by the increased losses at Reality Labs resulting in no real change to profits that accrue to shareholders.
• I still think that there is far more that Mr Zuckerberg could do to increase profitability and if this were to occur then the stock would look very cheap indeed.
• However, I am not convinced that he is likely to take it that far meaning that the value proposition remains uninteresting with more than 20x PER ratio being demanded for negative growth.
• In this market, there are many more interesting places to look.