Kira-Yan/iStock Editorial via Getty Images
What happened?
On 6/2, Bloomberg reported that Meta Platforms, Inc.'s (FB) Sheryl Sandberg will be stepping down as Chief Operating Officer in fall 2022. Sandberg has served as COO since 2008 and has been instrumental in transforming Facebook from a social media site for college students to a highly profitable digital advertising behemoth that generated almost $120 billion in revenue in 2021. Sandberg expects to spend more time with family and on philanthropy, but will remain on Meta's board of directors.
Who is the new COO?
Javier Olivan will be replacing Sandberg as COO of Meta. Olivan is a 15-year Facebook veteran who joined the company in 2007 as head of international growth. Back then, Facebook had 50 million monthly users and a small international presence. Today, Facebook has nearly 3.6 billion monthly active people across Facebook Blue, Messenger, Instagram, and WhatsApp, and more than 90% of users are outside the U.S. and Canada. Olivan studied electrical and industrial engineering at the University of Navarra (Spain) and holds an MBA degree from Stanford University. In addition, he was a key proponent of Facebook's $19 billion acquisition of WhatsApp in 2014.
What does this mean for the future of Meta?
Sandberg's departure adds another layer of uncertainty over issues currently troubling Meta, including a slowdown in the core advertising business, ongoing iOS impact (est. $10B in 2022), and heavy losses from Reality Labs on a metaverse vision that Zuckerberg understands will not be a viable business story for quite some time. While Olivan has a strong resume, I generally agree with Dan Ives of Wedbush Securities on his analogy that replacing Sandberg is similar to replacing Steph Curry of the Golden State Warriors.
At the end of the day, advertising is Meta's bread and butter, which brought in a total of $55 billion in operating income and a 47% operating margin over the past 4 quarters. Given the market's lack of interest in long-duration assets in a rising interest rate environment, Meta's advertising segment (97% of TTM revenue) remains the most important source of value on the simple notion that it is generating real profits now vs. at some point in the future.
Unfortunately, I see that value being undermined by the Reality Labs segment, which lost $10 billion in 2021 and almost $3 billion in 1Q22. While Meta has recently initiated a hiring freeze and will be scaling back Reality Labs (analysis here), the company's earnings outlook remains uncertain, as the metaverse project will likely continue to erode core advertising margins (see below).
Company data Company data
Of all types of investors out there, I tend to side with the old-fashioned bunch that sees a good-old stock buyback as the best way to generate shareholder value. Buybacks require no imagination, and I believe Meta's stock could've been in a better place had management used the $10 billion loss from Reality Labs to repurchase shares instead.
Thoughts on the stock
I am not bullish on Meta's stock given growth is unlikely to be impressive going forward despite easier comps in 2H22. Heavy investments in the metaverse remain a source of risk to the bottom line. On the other hand, I am not bearish on the stock because valuation is indeed in a very reasonable territory at 16x forward earnings. Perhaps Meta will recover along with the broader market when inflation fears abate and investors return to their senses, but I see better opportunities elsewhere. In digital advertising, Alphabet (GOOG) and The Trade Desk (TTD) remain my top picks (analysis here and here).
