Meta’s stock price has now risen by 420 per cent since its seven-year low in November 2022, including a 20 per cent rise alone since the start of this month, after its most recent earnings results. Some 96 per cent of Meta’s revenue is advertising.
The 2022 stock price low was primarily a reaction to the dramatic decline in advertising revenue impacted by an updated privacy policy introduced by Apple in the spring of 2021. A new version of the iOS operating system for iPhones enabled users to prohibit apps from tracking usage of other apps and websites owned by other companies, which then immediately eroded Meta’s ability to mine culled data for targeted advertising.
Meta rebuilt its advertising technology in response. In this month’s quarterly earnings call, Susan Li, the Meta chief financial officer, argued that advertising customers are now benefiting from Meta’s advances in artificial intelligence (AI) tools to improve the creation and focus of ad campaigns. Despite international trade tensions, revenue growth was particularly strong from Chinese online retailers exporting to the rest of the world. Meta’s family of apps – Facebook, WhatsApp, Instagram, and Messenger – are, however, banned within China.
A widely held thesis that Facebook’s advertising revenues are gradually declining in favour of Instagram was strengthened when Li announced that she would no longer publish Facebook-specific metrics. Instagram is itself facing strong competition from China’s TikTok, favoured by younger Gen Z audiences for informality and intolerance of paid adverts.
In the same earnings call, Meta chief executive Mark Zuckerberg emphasised his commitment to AI and virtual reality (VR). He noted that sales of the Quest VR headset had exceeded $1 billion (€930 million) for the first time in a quarter, and that Meta’s metaverse showpiece, Horizon Worlds, continues to grow.
An obvious challenge is how to create sufficient fiscal space to fully compete in the industry move into generative AI alongside Zuckerberg’s now decade-long metaverse crusade
Meta has invested heavily in its metaverse concept since its $2 billion acquisition of the Oculus VR headset 10 years ago. From January 2019 to September 2022 alone it spent $36 billion, equivalent in Irish terms to 15 new national Children’s Hospitals.
And for what? Horizon Worlds has been an embarrassment, with its goofy avatars, indifferent graphics and a distinct lack of commercial advertising partners. It is put to shame by virtual worlds such as Fortnite, the social ecosystem from Epic Games, which just last week announced a major collaboration with Disney.
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The Quest 3 VR headset is acceptable, but Apple – Meta’s nemesis – has just released the first version of its revolutionary Vision Pro. While Vision Pro is expensive ($3,500, compared to Quest’s $500) and heavier to wear, the quality and resolution of its real-time images are nevertheless outstanding. It does not yet have a large portfolio of apps which exploit its capabilities, but TikTok, among others, has just released an impressive Vision Pro-specific version.
Meanwhile, generative AI has dramatically changed the technology universe over the past year. Meta was researching AI for some time with two separate teams, but was apparently wrong-footed by ChatGPT’s public release in November 2022. Zuckerberg has stressed his urgency to bring these two groups closer to the Meta business teams and find commercial partners.
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An obvious challenge is how to create sufficient fiscal space to fully compete in the industry move into generative AI alongside Zuckerberg’s now decade-long metaverse crusade. Zuckerberg declared 2023 the “year of efficiency”, proceeding to lay off about 22 per cent of the staff and to freeze hiring. The free cash flow (remaining after capital investment is subtracted from operating profit) more than doubled as a result.
Zuckerberg intends to resume hiring, “swapping out certain talent profiles for others”. Capital investment will increase by a further $2 billion, primarily to purchase high-end hardware for training of large language models similar to ChatGPT. He asserted that Facebook and Instagram together provide a natural corpus of text, images and videos for such training.
My business mentor once emphasised that technology companies that start paying shareholder dividends have run out of credible innovation strategies
Some, however, believe that the brute force training of immense large language models is running out of steam. Even with all of Meta’s culled social media archives, there are insufficient data to train models with hundreds of trillions of tunable parameters. A superior strategy for generative AI may be possible without substantial quantities of premium hardware and of (potentially mediocre) training data.
Meta is also facing growing regulatory pushback, especially in Europe. It may well need to augment its expensive explorations of the metaverse and AI with a substantial ramp in both talent and reworked technology to meet emerging regulations.
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My business mentor once emphasised that technology companies that start paying shareholder dividends have run out of credible innovation strategies. Good technology companies fully reinvest in pragmatic creativity.
Meta has just announced its first ever shareholder dividend, enhancing its recent stock bounce and perhaps placating investors concerned that its improved free cash flow may otherwise be squandered. Nevertheless, I believe Meta has a difficult time ahead from its competitors in advertising, metaverses and AI, on top of both emerging regulatory enforcement and self-inflicted new shareholder expectations.
