Meta Stock and The Metaverse Thesis

“You know who” had a meeting with his fellow Twitter employees in which he talked about how advertising return on investment (ROI) doesn’t need to be provided in bull markets. Just throw money at any old influencer and who cares what sticks. These days, media companies need to show they’re effective at showing an ROI on advertising spend, especially for social media.

Social media may be a disruptive technology, but it has done little to benefit mankind except to create a generation of superficial narcissists with eight-second attention spans. More concerning are marketers in big corporations throwing money at this behavior under the guise of buying “influence.” Consequently, social media firms have become fat and lax, Twitter being a great example of what easy money does to large companies.

Mr. Musk’s takeover of Twitter provided the perfect catalyst for advertisers to start questioning what ROI their ad spend has been getting. Outrage aside, the corresponding revenue decline is part of a much bigger picture – the global slowing of advertising spend.

Advertising Spend Slows

Ad market growth is expected to slow down significantly in 2023. That’s according to marketing analytics firm WARC which expects global ad spend to grow by 8.3% this year to a total of $881 billion, but fall to 2.3% growth in the coming year. There’s every reason to believe growth will stall because of the delayed reactions we’re seeing. It takes time to craft messaging around layoffs and budget cuts. Firms are now doing year-end budget planning and goal setting, so we can expect less money will be thrown at advertising since (wait for it) people and companies are spending less because it’s a bear market. These vicious cycles can quickly curtail ad revenue growth.

Proof of the ad spending slowdown is evident in the lockstep quarterly revenue growth for two companies that rely heavily on ad spend – Google and Facebook seen below.

Bar chart showing quarterly revenues for Google and Facebook/Meta
Credit: Yahoo Finance

Bulls might argue that digital ad spend will continue displacing traditional advertising such that growth continues, even in today’s bear market. Given Facebook’s guidance for this year, their fourth quarter – traditionally the largest of the year – will show a quarter-on-quarter decline. (Orange bars below show 4th quarter revenues, the red bar shows midpoint of Q4-2022 guidance for Facebook.)

Bar chart showing Facebook's quarterly revenues
Credit: Nanalyze

It’s just one of many financial metrics that are heading in the wrong direction.

Facebook’s Financials

Since Facebook’s IPO just over a decade ago, we’ve avoided even looking at the stock, and we haven’t missed much. Performance so far of +206% hasn’t stood up to a Nasdaq return of +340% over the same time frame. Most of Facebook’s value has been eroded over the past year, a decline that can be attributed to any number of factors such as problems with Apple, or the lackluster reception of Facebook’s long-awaited metaverse platform. Advertising revenues appear to be stalling as the company’s margins continue to compress while they spend billions every quarter on Reality Labs (the metaverse).

Facebook financials
Credit: Facebook

With gross margins around 80%, Facebook is using their cash cow to fund the development of a metaverse offering that’s expected to provide future growth opportunities. Until that segment generates enough revenue to break even, we won’t have any indication that they’ve achieved product-market fit and an economically viable business model.

Other key metrics include average revenue per user, a healthy $49 in North America, but just $3 for the rest of the world. A proxy for total addressable market (TAM) might be the number of global smartphone subscriptions minus China (5.5 billion), and Facebook has around 3 billion monthly active users, so they’ve captured about 54% of the opportunity. Given global population growth of less than one percent, there’s a limit to Facebook’s expansion which appears to be tailing off.

ROI on Social Media Ad Spend

We dislike anecdotal evidence as much as the next guy, but our experience with social media advertising has been shite at best. Over the years, we’ve engaged some of the biggest social media platforms out there to build our brand and generate leads. What we found were results that showed algorithms playing matchmaking with people who weren’t genuinely interested in the topics we were promoting. Here’s what we asked for vs what we got.

  • Twitter, give me more followers. What you get are people with accounts that follow 5,000 and are followed by 50. In other words, the algorithms pointed us to the low-hanging fruit – people who will follow just about anything.
  • YouTube, give me more video viewers – What you’ll get are loads of viewers whose average viewing time is 21 seconds on a 10-minute video, something that actually hurts your video. Again, the algorithms are finding the low-hanging fruit – people who click on anything.
  • Facebook, give me more followers and traffic – See the Twitter example. We’re also inclined to believe that many of these are fake accounts, among other problems. We were spending $20K a month generating leads on Facebook when they refused to escalate our complaints, so we dumped them like a hot potato.
  • Google, give me leads – Not social media but worth noting. We’ve had some success running ads with Google, though find other parts of their platform to be woefully lacking. Google directs people who are looking for something specific so they can target our content with engaged eyeballs.

See the trend? The ability to target engaged people is where social media falls flat. Lean organizations quickly realize they’re throwing good money after bad, but it takes a bear market for large corporations to start scrutinizing line items. If some of the world’s most powerful software-as-aservice (SaaS) solutions are now being required to get signatures at the C-level, it’s only a matter of time before Gwyneth in marketing starts being challenged as to what ROI is being realized by social media ad spending.

“You know who” talked about how companies he spoke with would gladly hand over marketing dollars if they’re seeing a quantifiable return on their investment. Maybe that’s why Twitter wants to start adopting long-form content (Mr. Musk commented “interesting” when someone mentioned he ought to buy Substack, a paid newsletter publishing platform with a variety of content). With Google, leads arrive at your content organically or through targeted ads. With Facebook, the algorithms decide who gets to see the ads, and they’re not always engaged people. A better strategy for companies is to develop their own social media presence, something that shouldn’t take an entire department to accomplish.

Organic Growth vs. Advertising

When we put up a YouTube channel a year ago, we weren’t expecting much. Today, our small lot of 5,000 followers generate sales leads that are converting into paid subscribers. Building a following on social media channels organically is where the value lies in business-to-consumer sales.

Wendy’s has a snarky social media account that they’re able to rake in brand equity with, and you can be sure they’re pulling levers to see what works. If they run a special on nuggets for their Twitter followers, it’s easy to see how that translates into a return on investment. The cost is one intern who can come up with a few witty comments per day, and a social media management platform like Sprout. But if Wendy’s threw a couple million at Twitter trying to advertise the same, the results would probably be quite different. That’s because you have lots of sheeple on social media platforms that like or follow everything they see. These are vanity metrics that mean nothing unless they generate revenues.

Social media ad growth will likely taper off as marketers get smarter about how they track ROI. Platforms must start adding more value to the process. As for engaging “influencers,” that’s best approached using commission-based affiliate marketing and referral campaigns which make other people do the work for you.

Facebook’s Mega Meta Bet

Both Google and Facebook have tried using their ad cash cows to grow other parts of the business. For Google, that’s mainly been cloud computing, and for Meta, it’s been the metaverse. Capital expenditures of $22.8 billion for the first three quarters of this year mean that Facebook is fully committed to investing in future growth, even though Reality Labs hasn’t quite taken off yet. They’ll need to realize about 10X current revenue for that segment in order to start breaking even (based on last quarter’s numbers), and the trend doesn’t appear to be going in the right direction as Reality Labs revenues stagnate amidst brutal reviews of the platform.

Brutal reviews of Meta's platform as shown in this article headline.
Credit: Kotaku

The value proposition on offer from Meta seems analogous to Ocado’s appeal as a robotics company. Sure, warehouse robotics is ultra sexy, but at the end of the day, Ocado is just a UK grocery company with a robotics side project. Facebook is a social media advertising company with an expensive metaverse project that doesn’t seem to be bearing fruit yet. Yes, Rome wasn’t built in a day, but until the metaverse is showing a growing revenue stream that’s a meaningful proportion of total revenues, then it’s all speculation. The number of people willing to buy an expensive virtual reality headset, then not stop using it after six months, remains to be seen. Says an article by Kotaku:

And while the Quest 2 headset has sold very well, a lot of the customers aren’t returning to play anything. It’s reported that more than half of all Quest headsets stop being used by players after only six months.

Credit: Kotaku

In late November, Facebook trimmed 13% of their 87,000 headcount (seems pretty high for a social media platform, no?) with concentrations on “recruiting and business.” A company where the employees complain about the quality of toilet paper, and where an executive has the audacity to preach that meritocracy is a myth, can probably stand to trim a lot more. After chopping 74% of headcount, Twitter’s fearless leader expects $3 billion in revenues in the year to come with expectations of breaking even and one billion on the balance sheet. (No, we don’t know where the other 5 billion went from the last time we looked, but it’s likely related to the M&A transaction.) The current market environment presents the perfect opportunity to clean house and start getting operating margins closer to those 80% gross margins investors have been salivating over.


Trying to spin Facebook as a play on anything except social media advertising seems pointless. If you’re bullish on the growth of digital advertising, now is a great time to buy some leaders at discounted prices. Each company comes with its own promise of future growth based on some disruptive technology that’s being funded by a digital advertising cash cow. Facebook’s heavy bet on the metaverse needs to show traction before we’d consider taking a second look at the stock.

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