“Shareholders now demand return on tech company investments”

Published on: 27 July 2023

Eight months ago, big tech was struggling. Share prices were under pressure and so were revenues. For the first time, they had to tighten their belts: Amazon, Meta (Facebook, WhatsApp, Instagram) and Alphabet (Google) have laid off tens of thousands of employees since November of last year. Meanwhile, a Meta share is worth almost three-and-a-half times as much again. Henny Crauwels of APG’s Fundamental Share Selection team explains the key drivers for the value of a tech share like Meta.

• During the Covid pandemic, activity on social media increased. After that, a variety of factors caused a sharp decline in the growth rates of companies like Meta and Amazon.
• Shareholders - successfully - made it clear that there has to be a return on investment.
• Once a social media company is on the throne, it is difficult to remove it.

Amazon has now laid off 27,000 employees, Meta said goodbye to 21,000 employees and 12,000 people were forced to leave Alphabet. As Senior Portfolio Manager, Crauwels mainly follows Meta and comments that a company like Amazon or Apple cannot simply be lumped in with Meta and Alphabet. For instance, Meta and Alphabet’s main drive of share value is their advertising. And, although the advertising market is also becoming more important for Amazon, this company still has to rely mainly on “box shifting” and data centers (AWS).

At the end of last year, these companies all seemed to be in the same boat. How did that happen?
“During the pandemic, activity on social media boomed. There was a lot of online buying, which of course benefited Amazon. All stores were closed and there was a lot of advertising on Facebook and Instagram, which worked out in Meta’s favor. Based on those high growth rates, these companies had hired a lot of staff. When the world reopened last year, that growth fell back and there was a price correction on the shares of these companies. In addition, they had hefty cash positions, some of which they had invested in bonds. Because the bond market was not doing well, they suffered. The war in Ukraine and the resulting economic uncertainty also had a negative effect on Meta’s advertising revenue. What also cost a lot of stock market value at this company were the tens of billions that Mark Zuckerberg wanted to invest in the Metaverse, even though it would not pay off for ten years - if it paid off at all. There was also more competition in the online advertising market.”

Where did that competition in the online ad market come from?

“That was due to the rise of TikTok, which Meta tried to copy by integrating Reels into Facebook and Instagram. But because it was something new, advertisers were not yet prepared for it. What made things worse for Meta is that it could no longer simply use user data generated on platforms other than Facebook. Apple put a stop to that, because users of Apple platforms must now give explicit permission for that. As a result, Meta’s ad revenue fell. On Android phones, that problem does not yet exist for Meta, but Google is working on something similar to what Apple did. Once Google implements this, Meta will also be affected, albeit to a lesser extent than Apple. In the US, iOS is bigger than Android, and because iPhone users on average have more to spend, they are more interesting to advertisers.”

The share price of Meta, as well as other big tech companies, have since recovered significantly. How did that happen?
“Until now, these companies have never paid attention to costs; whatever they came up with, there was money for it. But the second half of 2022 led to a paradigm shift, resulting in mass layoffs. Shareholders have made it clear that they won’t just accept any investments; there has to be a return. Zuckerberg, too, has now shown that he is paying more attention to the share price. At a number of companies, including Meta, this paradigm shift has led to a share price recovery.”

For social media platforms, money follows eyeballs

Meta recently launched Threads, Twitter’s main competitor. How does that affect confidence in Elon Musk’s long-troubled company? 
“Twitter is no longer publicly traded, so for me, as an equity investor, it is of no interest. And the way the company is currently being maneuvered does not inspire much confidence in me as an investor.  The trends for Twitter are already not very good, with pretty unpredictable changes in user terms, declining user numbers and time spend. It is too early to make a concrete statement about the potential success of Threads, but if there is a time when a competitor can be successful, it is now.”

What are the main factors when it comes to Meta’s and Alphabet’s prospects?
“For social media platforms, money follows eyeballs. Last year, the question was still: are young people moving from Facebook and Instagram to TikTok en masse? In the meantime, that effect does not seem to be too bad. In addition, privacy legislation plays an important role: how are companies allowed to use data and how effective does that make the technology they use to target advertising? Also not unimportant is the focus on the negative effects of social media, which only seems to be growing. So far, these companies have managed to circumvent that reasonably well, but the question is whether that will continue.

In the short term, Meta scores somewhat better than Alphabet, due to the recovery of its ad revenue. In the longer term, Alphabet will probably score a bit better, because the company has more technology that is going to be required in the future, such as self-driving cars. Their capabilities are also more spread out. Facebook is betting on the Metaverse and Virtual Reality, but should you put that much money into something if you don’t know if it will be successful? Investors don’t like that; it can’t be modeled. There are not many investors who look ten years ahead.

But I don’t want to be too negative about Meta/Facebook either, because it’s been said many times that the company would meet its end if some other new thing like TikTok showed up. And every time, they manage to just copy something like that anyway. Once a social media company reaches a certain size in terms of users, it’s pretty hard to knock it off its throne.

Finally, there is the risk that the government will split up these types of companies because they are becoming too dominant in the market. For Alphabet, that risk is probably a bit greater than for Meta.”

Apple, Alphabet, Microsoft, Amazon and Meta are among the “Magnificent 7”: the great forerunners in AI. How will developments in this area affect the share value of these companies?
“In general, outside of these companies, hardly any others have the scale and knowledge to develop current developments with generative AI and large language models. Microsoft (via the link to ChatGPT) and Alphabet are seemingly ahead at the moment. In principle, this should be good for shareholder value if the applications indeed deliver on the promises. But there are still many uncertainties, such as the extent to which these models are trained with copyrighted data. This could lead to expensive lawsuits and limit these companies’ access to the data needed to further develop the models.”