Meta Platforms – Knives out

Meta’s corporate governance is becoming an issue.

• The activists are starting to come out of the woodwork voicing their dissatisfaction with Meta, but the reality is that unless they convince Mr Zuckerberg, the only vote they have is with their feet.
• Altimeter Capital, which owns $325m in Meta has written an open letter (see here) to Meta bemoaning the awful share price performance and its level of expenditure both on the Metaverse as well as more generally across the company.
• Altimeter is of the opinion that Meta has become bloated over the course of its very rapid growth and now needs to reduce headcount expense by 20%, reduce capex by $5bn and limit investment in the Metaverse to $5bn per year.
• All things being equal this would return Meta in line with its peers in terms of free cash flow generation and help reverse the large PER discount that has opened between Meta and the other digital ecosystems (ex-China).
• Altimeter is careful to be non-confrontational and as such it is not making demands which I suspect is driven by the knowledge that the only person who has any say in how Meta is run is Mr Zuckerberg himself.
• This again lays bare the shortcomings in the corporate governance of many technology companies around the world where founders still control the company despite having sold the vast majority of the economic interest.
• This is achieved through a separate distribution of shares which carry 10x or more as many votes than the shares in wide distribution which is a practice that I have long argued has no place in large public companies.
• In small private companies, this is not a problem as they often need to be able to pivot very quickly to adjust to changes in their operating environments.
• In large public companies, it means that founders often hold onto losing strategies due to emotional attachment without having to pay the economic price.
• While the share price continues to rise, nobody except outliers (like RFM) care, but it is when things go wrong that this issue comes back into the spotlight.
• This is exactly what is starting to happen now, and I doubt that Altimeter will be the last shareholder to voice its dissatisfaction.
• Meta Platforms is an extreme example of this because if Mr Zuckerberg is determined to run Meta into the ground to pay for investments in the Metaverse, there is no one that can stop him.
• This is the danger of investing in all public companies where there is a mismatch between control and economic interest, and I have historically dealt with this by adding a discount to fair value in order to account for the added risk of founders acting against the interest of other shareholders.
• At 12x 2022 PER, this discount is now at 50% which makes Meta an interesting proposition to consider.
• However, I am not yet convinced that the worst of Meta’s issues are behind it in terms of digital advertising and the impact of the retirement of its cash register (Sheryl Sandberg) has yet to be felt.
• Hence, while Meta is clearly in value territory, the time is still not right to take a position in it.
• I remain happy to sit on the sidelines and wait a bit longer.