Turning peepee into gold: Investors love Zuckerberg’s better beta Meta
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The brains at the social networking company Meta Platforms (META) – previously doing pretty good as Facebook (there was a movie about it called The Social Network), shared fresh plans this week to burn off 10,000 employees and then cull another 5,000 additional, unspecified gigs.
The job cuts are Part 2 of a Hemsworthian fitness putsch which began around the night of October 27, 2022 when Meta’s already falling stock price fell off another, even more precipitous cliff, once people came to understand just what a dismal, sad and pathetic Q3 it’d just delivered.
A lot of highly-paid people had been very busy burning through a lot of midnight oil in search of what a very clever founder thought he’d find somewhere at the end of a digital rainbow.
We’re 18 months into the Facebook name change and Meta’s dreamlike Metaverse looks a lot to us like lead did to Dark Age alchemists.
But that doesn’t mean they had the wrong idea.
The entire field of Chemistry evolved almost accidentally out of alchemy in the 1600s.
Let us recount together the delightful and apocriful tale, first foisted upon me by author Bill Bryson, of the unsung Henning Brandt of Hamburg.
The year is 1675. Brandt is a decent enough merchant during the height of the medieval confederation of guilds and market towns known as the Hanseatic League.
Brandt in truth is a Zuckerberg-like Prussian adventurer-of-the-mind fascinated by alchemy – the art of turning base metals into gold.
This devotion eventually leads him to burn through wives and their money into a very dark and some might say foolhardy place where collecting and distilling pure urine to create pure gold seems like a pretty good plan.
Brandt served (what must’ve been a brief but happy time) hacking at French Imperialists as a junior army officer in the 30 Years War, before he was finally able, via a substantial (Series A) dowry, to pursue his true interests.
By the time his first wife died, her fortune and his ideas were almost exhausted.
Fortunately, Brandt conjured himself both a second wealthy widow (Series B) and the new idea.
He turned to the glorious, unexplored potential of man wee.
Believing for some reason that with enough buckets of his chosen base material – boiled down relentlessly he can obtain 120g of the element.
Brandt is, as you might imagine, in a dark place. He’s been collecting urine through various best-not-to-mention means and his not-yet-chemistry lab in the cellar of his increasingly unpopular and malodorous house has become a laughing stock.
By now though he’s mad for urine. But like the Zuck, his stock was down and the pursuit, however brilliant in concept, is an abject failure.
However, late one evening, Brandt (calling on all his powers of dormant observation) can’t help but remark how a batch of urine glows with an ethereal, even ungodly glow. He notices also, with some surprise, how the glowing vats of urine have a tendency to spontaneously explode into flames.
He has not invented gold, but he has created phosphorous.
A discovery which, some might say ironically, is so commercially potent that its retail price surpasses the price of gold once the Swedish chemist Karl Scheele comes up with a less debauched method of mass producing it a century later.
Which is why Sweden (and not Brandt) soon becomes the world’s largest producer of matches.
Facebook meantime renamed itself “Meta” because its CEO Mark Zuckerberg envisions a future version of the internet he thinks everyone will accept as The Metaverse.
But in that pursuit the tech giant UBS is calling its Top Pick in the internet space now believes it’s discovered a urine of its own.
Its top investment priority will be advancing artificial intelligence.
In a letter to Meta employees this week Zuckerberg revealed “(Meta’s) single largest investment is in advancing AI and building it into every one of our products.”
He went on to say how AI tools help users “express themselves” and “discover new content,” and how the same tech is helping “engineers write better code, faster.”
We’re focused on the long term. That means investing in tools that will make us most effective over many years, not just this year — whether that’s building AI tools to help engineers write better code faster, enabling us to automate workloads over time, or identifying obsolete processes that we can phase out.
Our developer tooling work is underway and seeing good results. For example, Buck2 is our new open source build system that compiles builds around 50% faster so engineers can spend more time iterating and less time waiting. Our analysis found that engineers whose builds were sped up by Buck2 often produced meaningfully more code.
UBS are new fans of this, although the new realist approach to business of the previously starry-eyed CEO is what’s making the investment bank put Meta out in front of the other tech monsters.
According to UBS scenario analysis, if META can get back to its 2021 share of digital advertising, it could add $18bn of top line revenue in 2024.
This is because Zuck will lay off another 10,000 Meta employees in the coming months and cancel half of that again in new hires.
He also doubled down on his new efficiency focus – the pivot to efficiency – flagged with applause at Meta’s recent quarterly results. after some mad years of wild alchemic investing from the metaverse to other unproven potentials like virtual reality.
Now Meta’s all about cost cutting and streamlining.
Building The Metaverse “remains central to defining the future of social connection,” Zuckerberg says, but that isn’t where Meta will be putting its urine.
Meta’s latest job cuts are Part 2 the tech giant’s weight loss program triggered on October 27, 2022.
By market close shares are down 25%, going for under US$98 a pop, a disgrace not felt at the social network since 2016. But what the hell, Meta’s stock is already down about 70% since Christmas.
On the morning of the 28th of October Meta’s worth is US$270 billion, barely a third of the US$900 billion its market cap had been at the start of the year.
In November they lay off 13% of the workforce, some 11,000 people.
A contrite CEO and founder fronts the press and all cranky stakeholders and pockets his dreams of a new internet and promises to focus on reality, as opposed to the virtual one he can almost taste.
Today, despite the very hostile market conditions, Meta earnings are inflecting higher which goes to show just how much of that extra big tech fat around the waist can be burned off to support earnings.
The announced US$3bn in reduced operating spend, plus the US$3bn of higher restructuring charges, points to an operating expenditure saving of US$6bn for 2023 – annualising to ~$8bn in 2024.
That’s almost $2.50/share in Earnings Per Share on top of UBS’ $13.00 per share in EPS.
It’s also something a sensible Swiss investment bank likes, and opens up improved revenues driven from three directions, according to UBS:
The new Zuck is now speaking a language investors understand.
In a note to clients, UBS highlights several key points from Zuck’s office memo that even the most bearish of old school investors can’t but help admire:
1. Flatter is faster.
“It’s well-understood that every layer of a hierarchy adds latency and risk aversion in information flow and decision-making. Every manager typically reviews work and polishes off some rough edges before sending it further up the chain. In our Year of Efficiency, we will make our organization flatter by removing multiple layers of management. As part of this, we will ask many managers to become individual contributors.”
2. Leaner is better.
“Since we reduced our workforce last year, one surprising result is that many things have gone faster. In retrospect, I underestimated the indirect costs of lower priority projects. A leaner org will execute its highest priorities faster. People will be more productive, and their work will be more fun and fulfilling.”
3. We’re focused on the long term.
“That means investing in tools that will make us most effective over many years, not just this year — whether that’s building AI tools to help engineers write better code faster, enabling us to automate workloads over time, or identifying obsolete processes that we can phase out.”
“At this point, I think we should prepare ourselves for the possibility that this new economic reality will continue for many years. Higher interest rates lead to the economy running leaner, more geopolitical instability leads to more volatility, and increased regulation leads to slower growth and increased costs of innovation.”
Consensus Recommendation: Buy / Price Target US$221.34 (Share Price US$197.75; +1.9%)
UBS Recommendation: Buy / Price Target US$235
CS Recommendation: Outperform / Price Target US$220
Footnote: Brandt, Kraft of Dresden, Johann Kunckel and Carl Scheele
As an historic footnote, Brandt, desperate for funds, sells his secret to Daniel Kraft of Dresden, another alchemist, on the condition he did not tell a third German alchemist Johann Kunckel about any of it because Kunckel was a jerk.
Kunckel however, unafraid of a little wee, was later to prepare phosphorus from urine himself and publish his findings.
Kraft demonstrated the various properties of phosphorus to the courts of Europe, while for over a century, Kunckel was credited with its first discovery.
Scheele was also an unlucky bugger.
He discovered oxygen (although Joseph Priestley published his findings first), and identified molybdenum, tungsten, barium, hydrogen, and chlorine, among others.
He was big on acid. He found organic acids like tartaric, oxalic, uric, lactic, and citric, as well as hydrofluoric, hydrocyanic, and arsenic acids.
Unfortunately in his scientific vigour Scheele was also big on insisting he taste every substance he ever worked with.
Surprising no one, he was eventually found dead in his lab, surrounded by the innumerable and incredibly toxic substances he’d been playing with all his life.