Late last year, I shared that, at some point, “Even the market’s strongest businesses and top gainers become attractive targets for short selling.”

And I singled out Facebook — which has since stupidly changed its name to Meta Platforms, Inc. (FB) — as being particularly vulnerable.

Sure enough, shares are down nearly 40% since that time, which has prompted many investors to consider it a bargain.

I see their point. After all, the stock is now trading at its most “compelling” valuation in ages.

More specifically, at current prices, the company sports a price-to-earnings (p/e ratio) of 15x, versus its five-year average p/e ratio of 29x, and a p/e ratio of 21x for the S&P 500.

But don’t let that screaming “discount” fool you.

I’m convinced the stock could fall another 40% before any meaningful rebound materializes.

Here’s why…

Recession Refresher

You’ll recall, my original bearish thesis on Facebook centered on the fact it did not represent an investment in a new-school social media platform, but instead an investment in a decidedly old-school business: advertising.

As such, the company is beholden to that group. Period.

There’s no arguing this point either, as the data can’t be denied.

Quarter-in, quarter-out, Facebook generates north of 97% of its revenue from advertisers.

But here’s the rub: recessions sink advertising-based businesses!

Why? Because when times get tough, the first thing the average company cuts is its advertising budget.

Despite countless studies indicating this is the worst decision a company can make — from highly respected publications like the Harvard Business Review, McGraw-Hill, and the North American Business Press — it still happens.

So when the next recession comes, Facebook’s going to be in trouble.

And guess what? It’s becoming increasingly likely the economy’s going to enter a recession in the coming year. Unless the Fed manages to engineer a miraculous soft landing, which virtually no one is predicting.

It’s more a matter of how long the impending recession will last, not if the economy’s going to enter one.

So yeah, Facebook’s core business is about to go on a ride on the “struggle bus.”

But what about the metaverse you say? Puh-lease!

Permanent Pivot Mode

While the metaverse promises to be an exciting growth opportunity — eventually — Facebook’s not going to be a major player in it.

No matter how hard it tries to convince investors otherwise by changing its name and earmarking $10 billion for research and development.

Blasphemy, you say? Not hardly!

Again, simply look at the facts.

As the reporters at Axios noted recently, “Facebook has made pivoting a habit.”

Indeed! The short-list of its pivots include:

• Pivoting to audio a year ago on the heels of the pandemic-driven popularity of Clubhouse, the live audio app. Facebook launched a podcast platform — but now it plans to shutter it next week, per Bloomberg.
• Pivoting to video news content in 2016 and boldly proclaiming all content would be video within five years. Fast-forward five years and — you guessed it — the majority of content is not video, and the company (and in turn, content creators) abandoned this prioritization long ago.
• Pivoting to free speech, privacy and crypto in 2019, which have now all been largely abandoned, as evidenced by the company permanently banning users, still operating the majority of services in unencrypted mode, and of course, officially abandoning the crypto project in February of this year.

Bottom line: Facebook is always in pivot and marketing spin mode. The pivot to the metaverse, announced in July 2021, represents the latest example.

While the commitment this time around appears solid, including plans for four VR headset launches over the next two years, it won’t last once the hype fades and another opportunity to pivot materializes.

And once the next recession materializes, it’s going to sink all advertisers, including Facebook. Bet on it!

Ahead of the tape,

Tags: facebook recession