Mr. Market Meets the Metaverse
A lesson in opportunity
Note: This article is for educational and informational purposes only and does not constitute investment advice in any way.
THE BACKGROUND
In 2021, Meta (previously known as Facebook) saw the future and it was virtual. They launched Horizon Worlds, changed their name to Meta and heralded in a new age, the Metaverse age where we would all be donning headsets after our morning coffee (full disclosure; I don’t drink coffee), putting on our virtual business attire and heading into the virtual office for a solid day’s productivity before stopping by our local virtual watering hole on the way home (taking our headset off), all powered by Meta. Ready, Player One was hot (great book btw) and an obscure sci-fi novel Snowcrash (also great, but not as easy) gave us the term for the new age.
Since 2021, firm in their vision of the oncoming future, Meta have spent in the region of $80 billion - with a b - on trying to make VR fetch.
Wall Street hated it almost immediately. Zuckerberg's cachet as a visionary was overwhelmed by the scale, lack of validity and single mindedness of the dream he laid out. By late 2022, Meta's stock had plummeted by over 70%.
Investors, correctly, felt Zuckerberg was neglecting his highly profitable core business (social media and advertising) to chase a sci-fi dream that had very few actual users. They were watching in horror as 6 years of price growth was evaporating before their eyes taking them back to 2015 levels. Altimeter Capital, the legendary tech investors headed by the even legenderer (?) Brad Gerstner and a major shareholder in Facebo…..Meta, released a scathing open letter decrying the strategy.
In addition, alongside the VR vanity project, the company’s ranks had ballooned in 2020 and 2021, and the Street made it known that they felt they had taken their eye off of costs. Eventually, Zuckerberg blinked and on November 9th 2022 he announced they would be driving a series of cost cuts, dubbing 2023, the year of efficiency, which included a relaxing of focus on VR Labs. Wall St felt heard and the stock began to climb. With a renewed focus on the central business and an unexpected new wave of enthusiasm from AI, the stock eventually became a 6.5X bagger, from the Nov 2022 lows, based on the stock price at the time of writing.
IT IS NOT THE CRITIC WHO COUNTS
Investors though, aren’t always right about strategic spending like this and few know this more than Meta investors. In April 2012, weeks before Facebook was set to go public, Zuckerberg announced he was going to buy Instagram, a 13 employee company with no revenue which had only been in existence for 18 months for $1bn in a mix of stock and cash. Wall Street and the tech media thought Zuckerberg had lost his mind. The general consensus was that Facebook was panicking trying to make mobile a success. Zuckerberg was widely mocked in the media but time has shown the Instagram purchase to have been a strategic masterstroke and his $1bn spend is regarded as one of the steals of the century. Instagram is estimated to generate c.$80bn annually for Meta now. Then, two years later and long before Instagram had revealed itself as the masterstroke it was, he bought Whatsapp for…. $19bn, sending internet critics into hyperspace. Whatsapp has also shown itself to be a smart move.
So why not VR dear investors? For one thing, and maybe this was a driver (read: ego), beyond Facebook itself, Meta is not known for developing hyper succesful apps. Alphabet has that crown, with the company frequently cited as having 9 products with over a billion users (search, android, chrome, youtube, gmail, maps, play store, drive and photos). Instagram and Whatsapp were developed elsewhere but importantly they had user traction when they were bought. Instagram had 30 million users and was growing fast. Whatsapp had 430 million users when it was acquired and likewise was growing fast. VR on the other hand, was being pushed by Meta, not pulled by consumers and it was clear early on that take up was limited. That’s not to say it’s not very cool tech (and likely yielded many patents driving it’s AR glass sales) but Meta drove it so hard, at such cost and frankly, in such a naff corporate way (see below) that there was a strong sense by most they had gotten over their skis.
To be fair though, new endeavours often have to be built first before take up reveals itself and again this is a road Meta has been down before and with great success.
THE METAVERSE IS DEAD, LONG LIVE THE METAVERSE
It makes a great headline to say the metaverse is dead when Meta’s VR initiative has been demised but the reality, virtual and otherwise, is that the Metaverse is alive and well and growing. It is just that it is not happening in the format Meta and others (e.g. Google glass, Apple vision pro) thought it would happen. It is gaining ground via established platforms rather than landing fully loaded via a new experience.
Let me give you an example, I am a casual gamer. I rediscovered gaming during COVID, treating myself to a PS5 and signing up to Fortnite, to see what all the fuss was about. I have played it almost daily since, and I find it incredibly fun. It scratches some lizard brain fight or flight itch to compete I have in a low stakes but no less sating way. Importantly though to note, even I, the dull financier, have a persona in the Fortnite universe. A digital expression of how I would like to be seen - sharp white suit, gold waist coat shirt and tie, white face mask with gold pattern and gold oxfords if you must know - complete with particular emotes (dance moves and gestures) and music. I purchased, for real fiat money, Don’t Fear the Reaper by the Blue Öyster Cult which I, via my avatar (digital persona), break out i.e. a mic and stand appear and he sings and dances to the tune, when I have eliminated an opponent (Fortnite has the mechanic that when you are eliminated you occupy the POV of your eliminator).
This week, I noticed players in the game with creatures; dogs, cats, small dinosaurs etc. Fortnite had introduced “Sidekicks”, creatures that run alongside you as you play. They do not impact your game in any way but I was excited to get one. I went for a gorgeous apricot brown dog. I named him Toffee, or Toffee Prime to give him his full name. Here’s Toffee and my avatar dancing.
So what does this tell us. It tells me anyway, that the metaverse exists, not in the form of Horizon Worlds but in this more organic form where individuality and interaction exist in digital spaces. For those younger than me it’s a normal part of their daily lives, not just on Fortnite but their digital persona/s cross a multitude of apps and games. It also tells me that people will derive joy and sentiment from, and pay money for, what are on paper, intangible, seemingly, valueless bits and bytes. Bits and bytes I might add that have incredible economics.
NOW TO MR MARKET
The investment industry is full of very smart people fighting tooth and nail to see something others don’t see, to gain that slight edge (learn more about edges in my recent breakdown here). They derive complex insights and understandings of companies and industries they would never have entered themselves. They employ teams of analysts and quants and computers and now AI to divine even a hint of an edge.
But Meta’s VR descent into madness was a situation where the edge was hiding in plain sight. The danger here was being too smart about it, “solving it” and knowing the future as seen from the present. The street, delighted in being smarter than Mr. Zuckerberg, and eager to prove how right they were, sold the stock down to a P/E of c.8.5x. I will write that again in case you missed reading it the first time - 8.5x P/E. For Facebook. I had been watching this play out and as it continued downward passed 20x, 17x,15x, 13x I grew more and more interested and like a swooping Owl, my focus on the target grew as it came within my strike range.
I didn’t need reports from an army of analysts and quants on how the company operates, or to know their strategy for cost efficiencies ahead of time or that AI would lift the company in the near future. All I needed to assess was the likelihood of Mr. Zuckerberg continuing on his current trajectory as compared to the bargain basement price I was being offered by Mr. Market. A series of all nighters and deep dives into the nooks and crannies of Meta wasn’t needed. Mr. Zuckerberg is one of the most successful operators in business history. It took a couple of minutes to divine. I didn’t even divine it at 8.5x. I did it by c.12x P/E, thinking that was a crazy valuation for one of the greatest businesses ever created, a natural monopoly with a monster cash engine at its heart albeit going through a mid-life crisis of sorts. I bought at c.$118 at appropriately sized in my portfolio (very important element), watched it continue to fall to $89 before sense prevailed and it made a multi-year come back to new heights. The gamble that common sense would eventually take hold within the C-suite of Meta was an easy one to take at that price. At that price - a price that was one of the most viewed and talked about stock prices in investing - it absolutely deserved a place in the portfolio and common sense, and maybe a little experience, was all that was needed. I am still holding today.
Today the market is acting slightly haywire, every day, large reds or large greens light up my screens without a strong basis for either, especially relative to even a couple of weeks before. Mr Market is pricing the future in strange ways, unable to get a foothold in his outlook. This is undoubtedly an opportunity for the keen, Owl like market watchers. These are my favourite types of markets and when I hear things like “the metaverse is dead”, that’s the first place I go looking.
