Thursday, September 22, 2022
This week’s essays are dedicated to show you how to profit from a downtrend, as opposed to an uptrend.
Given the rising rates this week, and the global turmoil, we’re seeking to find saturated and slow-to-no growth markets.
For starters, look no further than the social media sector. This former boom industry has officially entered bust mode, which spells nothing but trouble for three social media companies — each for a different, but equally damning, reason.
The first is Meta Platforms, Inc. (META) formerly known as Facebook. No matter what you’ve heard from others, let me assure you: Meta does not represent an investment in a new-school social media platform or the “next big thing” in tech, the metaverse. Instead, it’s nothing more than an investment in a decidedly old-school business: advertising.
As such, the company is beholden to that group. Period. There’s no arguing this point either, as the data can’t be denied. Quarter-in, quarter-out, Meta generates north of 97% of its revenue from advertisers.
Here’s the rub: recessions sink advertising-based businesses!
Look no further than what happened to the first internet-based advertising company, Alphabet Inc. (GOOG). Shares lost over 60% from the start of the December 2007 recession.
Why is that? It’s simple, really. When times get tough, the first thing the average company cuts is its advertising budget. And just like Alphabet wasn’t spared, Meta won't be spared either when the next recession rolls around.
Speaking of which, we’re already in a recession after two consecutive quarters of negative GDP growth. We’re just waiting for official confirmation from the National Bureau of Economic Research.
But the impact is already showing up in Meta’s and other social media companies' results.
Newsflash: The underlying business headwinds impacting social media companies aren’t going away anytime soon. Not only are tougher privacy restrictions cutting into ad revenue, but so are inflation and general uncertainty about the economy.
In fact, in the most recent month, total ad spending suffered its worst monthly decline since July 2020. More specifically, ad spending fell 12.7% year-over-year in July, per MediaPost and Standard Media Index’s US Ad Market Tracker.
Add all of the market dynamics and it spells disaster for social media (i.e., advertising) companies with bloated burn rates.
Management teams know it, too.
Just look at the flip-flop on the hiring front. Instead of increasing headcounts, every single firm abruptly reversed course and started laying off employees. None of them are being spared…
Not even Meta, which wants investors to believe that its name change and subsequent pivot to the metaverse will insulate it from the next recession-driven advertising slump. It won’t!
Founder and CEO Mark Zuckerberg is a pivot professional. So much so, the reporters at Axios quipped, “Facebook has made pivoting a habit.”
Indeed! And they’re all short-lived, despite being marketed as major, multi-year growth opportunities. So don’t fall for the latest one.
If Meta’s business is ultimately doomed in a recession due to a downturn in advertising spending, that means Snap Inc.’s (SNAP) business is even more so.
Why? Because the company has no way to differentiate itself from the competition.
As I’ve shared before, Snap historically and routinely innovates without protecting those innovations with patents.
As such, giants and upstarts alike can copy Snap’s most popular innovations with impunity, and in the process, immediately undercut Snap’s advantage.
And that’s exactly what competitors have done, knocking off Snap’s “Lens” filters… its “Stories” format… its 3D face filters… the list goes on and on (see here).
The end result is that Snap’s network growth is capped, and since social media is all about the network size and the level of revenue you can derive from it, the company has essentially peaked. Recession or not.
Last but certainly not least, is the newest social media platform, Truth Social, which is supposed to merge with Special Purpose Acquisition company, Digital World Acquisition Corp. (DWAC).
But I’m convinced that it’s dead on arrival. Why?
Let me assure you it has nothing to do with politics. Not one bit. It’s purely financial.
Put simply, the economics don’t add up!
You see, when it comes to social media platforms, profits are generated when new platforms can build a big network, fast, and then monetize it with advertising.
As you can see below, the biggest social media network, Facebook, is also the best at monetizing its users. As such, it deserves the highest market valuation at $609 billion.
In contrast, Truth Social doesn’t have much of a network at all — maybe a few million users at best. Even its fearless leader can’t crack the growth code. Former President Trump has less than four million followers presently on Truth Social, compared to his more than 80 million followers on Twitter.
In other words, his followers aren’t following him to his new social media home.
Add in Truth Social’s technology stumbles, lack of international appeal and multiple regulatory investigations, and it’s highly likely that the deal never closes, and DWAC returns to a price in-line with cash on its balance sheet, which is around $10 per share.
By the way, remember to keep an eye on your inbox…
To continue my “busted tech” theme this week, tomorrow I’ll show you even more stocks to avoid.
Ahead of the tape,