Meta Platforms – Trouble in paradise

Metaverse will not save Meta from TikTok.

• There are signs that Meta’s push back against TikTok is flagging in a rare example of where a Chinese company is using technology to take market share from a giant USA digital ecosystem.
• TikTok is a short video sharing service that began life focused on sharing music and dancing selfie videos, but over the last 2 years, users have been using it for all types of videos mostly at the expense of Instagram and Snap.
• Meta called attention to this problem at its Q4 2021 results admitting that TikTok had managed to gain a lead in this space but went on to say that it thought that it had the “right technologies” to mitigate this threat.
• This admission combined with slowing growth cost Meta 25% of its market value in a single day.
• Meta launched a competing product called Reels in August 2020 which Meta claims has been growing very rapidly but there are some worrying signs.
• The Financial Times has surveyed a number of influencers who are paid to promote products and drive engagement on Reels and who have seen their incomes drop sharply.
• They claim that Meta has been cutting the amount of money that it pays out as well as increasing the engagement threshold that they have to breach before any payments are made.
• There are two possibilities.
• First, that Meta has seen no impact from the money that it is paying the influencers and is therefore cutting it or second, that this was a temporary program aimed at driving users onto the new services where they would stay.
• The problem is that cutting influencer incentives means that they will post on Reels much less which I think hints that Meta has failed to wrest the initiative from TikTok rather than the ending of a temporary program.
• This is a very unusual circumstance and one that I have not seen for a few years when DJI saw off all of its rivals in the drone space.
• It did this with superior software which made its drones much easier to fly and I suspect that something similar has happened here.
• ByteDance (Owner of TikTok) is first and foremost an AI company that has created a video characterisation algorithm that is really good at identifying and surfacing videos that users like to watch.
• It is much better at this than anyone else in the world representing an unusual (but increasing) instance where a Chinese company has better technology than anyone else.
• RFM research has long identified that Meta Platforms’ AI is not particularly good, but I suspect that in this niche, ByteDance’s AI is better even than Google’s.
• If Meta has failed to push back against TikTok and the engagement at Reels is beginning to tail off, then the outlook is that Meta is going to disappoint expectations meaning that it will be forced to lower market expectations again during this year.
• This will be badly received and the market is likely to further derate the multiple it pays for Meta’s earnings leading to further drops in the share price.
• RFM has also identified Meta Platforms as the runaway leader in the race to the Metaverse as its Oculus VR platform completely dominates the consumer market for VR.
• This puts it in pole position to be a leader in the Metaverse, but RFM research estimates that the real take-off is so far away in the future that its relevance to Meta’s fundamentals for the next few years is an irrelevance.
• This is why I continue to think that it is too early to invest in Meta for the Metaverse as its medium-term share price performance will continue to be dominated by issues such as this leaving the Metaverse for another day.
• Meta Platforms is relatively cheap compared to its global digital ecosystem peers (except Alibaba) but I think it may get cheaper still.