Tuesday, December 6, 2022

Update on Meta Platforms; More on inflation; Are we going to have a recession?; Bill Ackman on philanthropy

By Whitney Tilson

1) I saw three negative articles about Meta Platforms (META) in today's Wall Street Journal:

This triggered two thoughts for me...

First, Meta CEO Mark Zuckerberg should send Tesla (TSLA) CEO Elon Musk a truly over-the-top holiday present (a massive yacht?) for creating such chaos and drama at Twitter that regulators, media, and investors are, for the first time in years, distracted from the chaos and drama at Meta!

Second, considering this wave of negative news, I figured it's time for a check-in...

As a reminder, here's an excerpt from what I wrote on November 7, when I last discussed Meta in my daily:

In all five of my daily e-mails last week (Monday, Tuesday, Wednesday, Thursday, and Friday), I analyzed Meta and the various factors that have caused its stock to crash 76% in the past 15 months – wiping out a staggering $773 billion in market capitalization.

Today I'd like to summarize my analysis and explain why I've concluded that Meta's stock is a pound-the-table buy right now.

In short, Meta has been buffeted by no fewer than eight headwinds that, collectively, have severely impacted the company and its stock:

  1. Apple's (AAPL) privacy measures
  2. The massive rise of TikTok
  3. The end of the pandemic
  4. The strong dollar
  5. Metaverse spending
  6. Artificial intelligence ("AI") spending to address challenges from Apple and TikTok
  7. Reels cannibalizing more profitable segments of Facebook and Instagram
  8. Weak consumer spending, especially in sectors from which Meta draws advertising

In light of this perfect storm, I think it speaks to the extraordinary strength of the business that Meta still managed to report a 20% operating margin and $4.4 billion in net income last quarter.

And here's the key...

As I go down the list, I don't think these headwinds are likely to worsen, and some might even turn into tailwinds – for example, Meta's billions in AI spending might aid advertising targeting and help Reels better compete with TikTok. And the cost cuts announced yesterday could improve margins over time (see this article on the front page of today's Wall Street Journal: Facebook Parent Meta Is Preparing to Notify Employees of Large-Scale Layoffs This Week).

I think the odds of better-than-expected results going forward are especially good given that last quarter smelled to me like a classic "kitchen sink" quarter...

In summary, the year-over-year comparisons for Meta, which have been dreadful for the past year, are likely to, at the very least, stabilize – and there's a good chance they start to improve.

With the stock so universally reviled, I think there could be a rapid rush back into it in light of its cheap valuation and the heavy (25th largest) weighting in the S&P 500 Index. I could see it popping 50% on signs of stabilization, doubling on even the slightest hint of improvement in revenue growth, margins, and spending, and tripling if it actually happens.

In the month since I pounded the table on Meta, the stock has soared. On November 7, the stock closed at $96.72 per share... and earlier this morning it was around $115, up nearly 20% versus only 4% for the S&P 500.

My long experience is that when beaten-down stocks of exceptional businesses turn around, they don't just pop 20% – rather, it's usually 50% to 100% in a matter of months. For example, here's what I wrote about Netflix (NLFX) on November 7:

We don't have to look far to find an analogous situation for how I think things will play out for Meta – just look at fellow FAANG stock Netflix...

After years of astronomical growth, this dominant, global market-leading business faced a confluence of events that caused it to report its first two quarters ever of declining subscriber growth in the first half of this year (sound familiar?).

Investors panicked and Netflix's stock crashed by 77% over a brutal seven months (sound familiar?).

But then the company's turnaround plan, easing year-over-year comparisons, and incredible underlying strengths all kicked in... with the result that Netflix added 2.4 million new subscribers in the third quarter. Investor sentiment turned on a dime and the stock soared, surging 60% in just the past three and a half months.

In conclusion, I think Meta remains a strong buy.

2) Following up on my discussion of inflation in yesterday's e-mail, here are two more data points from Charlie Bilello:


3) Bilello is correct that "recessionary signals continue to build," but does that mean we're definitely going to experience a recession?

I would say that there is more uncertainty regarding this question than I've ever seen in my 25-year investing career.

This "Heard on the Street" column in today's WSJ captures the conflicting data, in which manufacturing indicators are weakening, but services, which account for 60% of GDP, remain strong: Services Come With a Smile, but the Economy Could Still Be Frowning. Excerpt:

The manufacturing sector has fallen into a funk. Services business are in anything but that.

The Institute for Supply Management on Monday said that its index of service-sector activity rose to 56.5 for November from October's 54.4, keeping it comfortably above 50, the break line between expansion and contraction. The details of the report were good, showing employment picking up and supply-chain problems easing.

The ISM's November manufacturing index last Friday wasn't nearly so cheery. It slipped to 49 from 50.2 a month earlier, marking the first drop below 50 since May 2020. That isn't quite a recession signal – according to the ISM, the manufacturing index has in the past generally needed to spend some time below 48.7 to signal that the economy is contracting – but it hardly counts as good news.

The different directions the services and manufacturing indexes have taken aren't hard to explain. The heady appetite for goods set off by the pandemic has begun to ease, and more Americans are re-engaging with services such as travel – in part because high goods inflation pushes the trade-off between spending money on goods and spending money on services in services' direction. Moreover, U.S. manufacturers are far more exposed to the global economy than services businesses are, so the combination of weakness overseas and a strong dollar is hurting them more.

The hope is that services will be able to take up manufacturing's slack. That might not be so easy to accomplish.

I remain cautiously optimistic that we will avoid a recession – or, if we experience one, it will be brief and mild – but I say this with a low degree of confidence and recognize that there are a wide range of possible outcomes...

4) I enjoyed this article in Bloomberg Businessweek, which is well timed in this season of giving: Want to Help Others? Philanthropy Experts Share Their Most Personal Advice. Excerpt:

We asked 18 leading activists, nonprofit executives, and donors to write a letter to their 18-year-old self – and share what they wished they'd known before starting out on a career in public service.

Here's what my friend Bill Ackman of Pershing Square wrote (full disclosure: I'm on the board of his foundation):

Bill Ackman

The 56-year-old founder and chief executive officer of Pershing Square Capital Management LP is also chairman of the Howard Hughes Corp. and a member of the board of Universal Music Group. Ackman and Neri Oxman are co-trustees of the Pershing Square Foundation, a family foundation that's committed more than $600 million in grants and social investments in areas including health and medicine, education, economic development and social justice.


I used to believe that business was about making money and philanthropy was about doing good. With the benefit of substantial business and philanthropic experience over the past 30 years, I have come to learn that for-profit solutions to most problems are substantially more likely to succeed than nonprofit solutions. In other words, you don't need to work for a nonprofit to do good. Good can come from business success even if the pursuit of profit is the primary objective of the business. That said, the ideal impactful career would be to work for and/or build a profitable company where its success is highly correlated with an important save-the-world ambition, Tesla being a good example. Imagine a nonprofit trying to convert the world's automobile fleet from carbon fuels to electricity.

Business success also creates resources and influence. Resources and influence are important levers for impacting the world and doing good. When I graduated from college, those who pursued lower-paying jobs in the philanthropic sector seemed to have the moral high ground. In retrospect, that shouldn't have been the case. Don't be ashamed about pursuing your dreams in the capitalist system, as your prospects for impact are substantially better than in the nonprofit world.

All of the above said, for certain problems there is no for-profit solution today, or at least someone hasn't thought of one. And it is here that your profits from success in business can be allocated to address issues where capitalism has to date failed to provide a solution. In selecting among nonprofit organizations, ones that are managed in a businesslike manner with clear objectives and models that allow for eventual self-funding, rather than reliance on donors, are generally the best options for investment.


Best regards,


P.S. I welcome your feedback at [email protected].