Much has been made of the big layoffs happening in the big mega-cap companies.
Some believe that these companies hired too much or built too much during the pandemic.
It’s an interesting criticism when you consider how much these companies supported the whole world during the pandemic and in the process had explosive growth.
We think the point often missed is that you don’t become successful, and you don’t win big, if you don’t take some risk.
Firing people is tough but the layoffs are a sign that these companies are not walking in the dark, are not wasteful, and are responsive to the realities of economics and business cycles.
The act of developing these big, super-fast-growing companies has historically been to hire a lot of people and invest a lot of money in technology.
Software is hard to build, and big teams are needed to accomplish hyper growth.
If things start to slow, they do the right thing and right size according to what the current economics expect.
Essentially, what we are seeing today will only make these mega stocks more competitive and profitable in the future.
Meta is another example of a company that keeps on getting richer.
You may not like them but two billion people a day use it and that is a massive moat.
Given the financial strength of Meta (80% Gross margins, EBITDA margins of 40% and after tax margins of 25%, all better than Apple by the way,) they are best suited to overcome any difficulty better than any company trying to compete in the social networking arena.
Meta is dealing with four threats.
- Government is doing its best to fine (tax) Meta (and all big US tech) for all kinds of concerns. As with all the mega-cap tech stocks the biggest concern is privacy. Privacy is a big deal and the costs to comply with all of the regulations are substantial. Meta alone reserves billions of dollar every year for the inevitable arbitrary and sometimes conflict rulings it is found to contravene. Additionally, it invests billions more annually to ensure it runs the fastest algorithms and best computer chips to ensure it filters out harmful content and ensure it meets legal requirements. This massive investment serves as a huge barrier to any entrant to become a substantial competitor. Like it or not the governments laws are making its moat deeper.
- Apple has upended the on-line advertising market. Apple says it’s doing this to protect your privacy. What Apple is also doing is building their own advertising model to compete. This has caused Meta’s growth to slow. It has caused other online advertising businesses to collapse. Hasta la Vista competitors, thanks Apple. But what makes it even better for Meta is that it has the profitability to invest in AI technologies to not only solve for all the above privacy issues but also solve for Apples policies. With the exception of Google no other company can push the needle harder to entrench themselves even deeper into the needs of individual users and the advertisers who pay for it.
- TikTok, like all the johnny-come-lately entrants into the social space, has introduced a new vigour into Meta’s playbook. You may not like copycats, but in business, it’s done all the time, it’s completely legal, and Meta is highly skilled at this. It killed Snap just like its doing now to TikTok. There is something incredibly powerful about having two billion people who use your product every day. Getting people to change when you can do it where you already are is a huge advantage. Once again Meta doubled down, invested massively in AI and is beginning to lap the competitors. Meta’s move to Reels is playing out exactly like the moves it made to beat Snap when it rolled out Stories. The same financial metrics seen when they took on Snap are signalling huge profits to come, and the competitors will be seeing even slower growth coming out of the slow down in advertising spending. Adding in the above mentioned big advancement in AI technology and Meta’s revenue should explode when confidence is regained in the economy and the competition can’t keep pace with Meta’s powerful algorithms.
- AI is expensive. Compute costs (chips and electricity prices) are going to cause social and search to have higher costs, but costs have always been increasing. Maybe the Metaverse is useless and never happens, but they have the resources and profits to protect and grow its existing business and take the risk to potentially have control over a new big thing. Very few can compete at the scale Meta can.
Meta produces unique content for you by connecting you to others.
Its user generated content and people seem to like to share a lot. Now something new is happening, people like to stare endlessly at computer generated content.
This is TikTok’s schtick and Meta is copying it in Reels. It’s hurting profits a bit but that will soon pass.
You have likely heard lots about ChatGPT.
ChatGPT is really just a chatbot that uses Generative AI tools to create content.
It can be right, wrong, funny, sad, entertaining, or infuriating.
It can also look and sound like you and do all kinds of things you would feel are unpleasant.
Personal security and your identity are going to be a big deal.
Recently, Meta announced that it will be rolling out a subscription business.
One of the features is added security and verification of your identity.
This will become important.
At first, not everyone will want to pay for the service, but our guess is amazing new services will be added to your subscription.
Only see what you want, discover who or what interests you, talk to an imaginary friend if you are lonely visit someone virtually.
All available now to those willing to pay in a secure manner.
All available to two billion users.
Meta’s decision to roll out subscriber fees is another example of aggressive shifting under the surface that has likely caught its competitors off guard.
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