The curious case of Meta
Why Meta lost 75% of its value in 2022 (and how it bounced back)
Hi everyone, welcome to the first edition of Rebound Capital. A massive thank you to all of those who subscribed. We crossed 600+ subscribers even before a single post!
At Rebound Capital, we conduct deep research into beaten-down stocks and study companies that made a successful comeback. Since this is our first post, as a quick favor, please reply “hi” or with any stocks that you think we should take a look.
Our first case study is on Meta — Why it lost 75% of its value in 2022 (and how it bounced back)
At one point in 2022, the market cap of Meta (formerly Facebook) dropped as low as $230 billion. All in all, the company had lost $800 billion in market capitalization in just one year and was down 75% from its previous all-time high.
What happened?
It was due to a combination of internal mistakes and external headwinds:
Slowing growth — In early 2022, Meta shocked investors by reporting the first-ever drop in daily active users, declining by about half a million DAUs in Q4 2021.
Competition from TikTok — The slowing growth, coupled with intense competition from TikTok, raised fears that Meta’s apps were losing user engagement.
Apple privacy change — This was a big deal back then. Apple’s iOS 14 privacy changes (App Tracking Transparency) began to significantly hinder Meta’s ad targeting capabilities. Meta initially estimated Apple’s new opt-out rules would cost them around $10 billion in lost ad revenue for 2022.
Metaverse bet — Facebook rebranded itself as Meta in Oct’21 in an effort to build a virtual reality world. The company then spent nearly $30 billion on Reality Labs without having much to show for it.
All this meant that the company took a significant financial hit in its quarterly reports. After posting a 37% growth in 2021, the revenue dropped 1% for Q2’22, and the net income dropped 36% due to the increased spending on Meta Labs. The total net income for 2022 decreased by 41% compared to 2021.
What was adding fuel to the fire were the macroeconomic conditions. 2022 saw the U.S. Federal Reserve aggressively raise interest rates (from near 0% to over 4% by year-end) to combat soaring inflation. This also marked the end of the “easy money” era that had greatly benefited growth stocks.
The rising recession fears caused companies to cut back on advertising spending, directly affecting Meta’s top line. The Risk-Off environment meant that investors were more comfortable with the 4% return on the treasury yield over risky bets, such as the Metaverse and AI. We can see this in how FAANG companies performed in 2022 — Even Apple was down 27%!
To top it all off, Jim Cramer teared up and made a public apology on CNBC for trusting Mark Zuckerberg. Funny thing is, the company is now up 400% from the time he said it. If he had stuck to his guns, it would have been one of his best pick.
Filtering for quality
While we all know that the stock made a remarkable comeback (we will get into the reasons later), it’s interesting to see how the company would have fared on our quality rubric by the end of 2022.
1. Are the fundamental issues with the company cyclical or secular?
Meta’s issues were partly cyclical (macro-driven ad slowdown) and partly secular (platform shift, changing privacy rules, and competition from TikTok). While it was simple to assume that the macro-driven issues would disappear once the economy rebounded, the secular headwinds were harder to predict.
2. Is the unit economics profitable?
Even with the macro headwinds, Meta had an exceptional operating margin. Meta’s Family of Apps segment, which encompasses the core social media and messaging platforms, delivered $42.7 billion operating income in 2022 on a $114.5 billion revenue (37% operating margin). These strong numbers were achieved despite the costly Metaverse mistake and lagging marco-environment.
3. How significant is the capital investment risk?
Of all the factors, this was the one contributing most against investing in Meta. They had made massive capital investments in the Metaverse idea and had lost $13.7 billion in Reality Labs. It was costing them $10 billion of capital per year with no near-term profitability.
Adding to the issue was that Zuckerberg remained steadfast publicly that these investments were critical for the company’s future. In the Q3’22 call, the CFO warned that the Metaverse losses might grow significantly in 2023 as Meta was launching new products and features.
4. How strong are the company’s financials?
Despite the profit decline in 2022, Meta’s overall financial position remained strong. The company had built a sizable war chest and maintained a debt-light balance sheet. Removing debt, the company had $30 billion in net cash and was highly profitable. This meant that Meta could weather downturns and continue investing without batting an eye. It also gave the company the capacity to execute significant share repurchases: Meta bought back $27.9 billion of its stock in 2022.
5. Is the management clear about the challenges?
Given the 2022 setbacks, there was evidence of increasing candor from the leadership team starting in 2023.
Zuckerberg openly stated that the company was entering a period of focus on efficiency after years of heavy growth. In the Q4 2022 earnings release, he announced that “our management theme for 2023 is the ‘Year of Efficiency’”.
Management was also clear on the privacy issues and explained how Apple’s iOS changes were a major headwind that the company was working to mitigate with investments in AI and new tools.
The best signal was management admitting their mistakes — In an internal message announcing layoffs, Zuckerberg took responsibility for being too optimistic on growth and over-hiring.
The Rebound
Even though the rebound was relatively quick and the stock more than doubled in a year, there were multiple entry points where investors could have made a good entry.
Nov’22 — Meta started their cost-cutting initiative that all the analysts were rooting for and laid off ~13% of their workforce.
Feb’23 — The company announced a $40 billion stock buyback, and Zuckerberg declared that 2023 will be the year of efficiency.
Mar’23 — Another round of layoffs with Meta removing 10,000 roles and freezing hiring for low-priority roles.
Jul’23 — Launched Threads to compete with Twitter and successfully started monetizing Reels.
Oct’23 — Revenue increased 23%, operating margin and net income improved. Trimmed expense guidance and highlighted that Reels alone was now doing $10B+ in ARR.
By February 2024, the recovery was complete, with Meta declaring its first-ever quarterly cash dividend of $ 0.50 and authorizing another $50 billion buyback. The stock added $200 billion to its market capitalization in a single session! The 2023 “Year of Efficiency” closed with full-year OpEx 8 % lower than initially planned, validating management’s course correction.
The rebound was so spectacular that even if you bought the stock in March 2024, you would still have doubled the return of investing in the S&P 500.
This is exactly why we started Rebound Capital. All great companies stumble once in a while and offer you plenty of opportunity to buy them for cheap. The only thing you have to do then is hold. If you enjoyed this report, please share this with a friend.
We would love to hear what you think. Reply to this email or
This Substack is a great idea and creates a niche in a competitive space.
I think the stock recovery chart you're showing with important events is really insightful. You didn't have to time the bottom perfectly to achieve outsized returns. The only problem, however, is that buying after the stock's already rebounded becomes a psychological obstacle.
Great first post, thank you!