Thursday, May 05, 2022
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.
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!
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:
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!
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