Late last year, I shared that, at some point, “Even the market’s strongest businesses and top gainers become attractive targets for short selling.”

I singled out Meta Platforms, Inc. (META) as a top short candidate, especially as a recessionary period loomed large.

If anyone listened, congrats! You’re now sitting on roughly a 50% gain (and counting).

Of course, such a sharp sell-off keeps prompting investors to consider the stock a screaming bargain.

In fact, I got into a fairly heated debate last week on Fox Business about it.

In case you missed it, while it’s true that Meta’s cheap, sporting a record low price-to-earnings (p/e ratio) of 12.75, I’m convinced it’s going to get cheaper still.

And here’s why…

Recession Refresher

You’ll recall, my original bearish thesis on Meta centered on the fact that it did not represent an investment in a new-school social media platform, but instead 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.

But 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…

If it Walks Like and Talks Like…

We’re already in a recession.

All we need to “officially” confirm it is a negative Q2 GDP number when it’s reported in a matter of weeks.

But we’re already getting “unofficial” confirmation from major economic data points and management at Meta.

Consider…

• Per Reuters, an internal memo from Meta’s Chief Product Officer warned employees of “lean times ahead as the company struggles with slowing advertising revenue and macroeconomic pressures.”
• Meanwhile, CEO Mark Zuckerberg shared with employees that this will be “one of the worst downturns that we’ve seen in recent history.”

If you don’t want to put too much stock in words, look no further than the business results and actions of top executives at Meta.

From Hiring to Firing?

Meta’s first quarter results reported in April confirmed the recessionary slowdown in ad spending already hit.

Case in point: The company’s ad sales growth slowed to the lowest rate since the company went public a decade ago and management cut second quarter guidance suggesting ad sales could decline by 2%.

Fast-forward to more recent weeks and Meta went from slashing hiring goals by 30% to an outright hiring freeze.

What’s more, it looks like heads are going to start to roll, as Zuckerberg admitted, “Realistically, there are probably a bunch of people at the company who shouldn’t be here.”

With nearly 78,000 global employees at the end of the first quarter, there’s certainly no shortage of underperformers.

Now, if you foolishly believe Meta’s name change and subsequent pivot to the metaverse will insulate it from the next recession driven advertising slump, think again!

Metaworse

I previously warned you that 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.

I’m convinced that the same fate awaits Zuckerberg’s latest pivot. And I’m already getting confirmation.

For one thing, Meta’s already slashed hiring and investment plans.

What’s more, key staff, including longtime COO Sheryl Sandberg jumped ship.

Sorry, but those two things don’t happen when a company’s on the cusp of another major growth spurt.

The truth is the metaverse isn’t going to amount to anything any time soon.

Case in point: A recent survey of technology innovators, developers, business and policy leaders, researchers and activists found that nearly 45% will have no interest at all in the metaverse by 2040. Another 23% said they won’t have that much interest. Only 12% said they would be “very interested.”

In other words, the metaverse is nothing more than hope and hype right now. And for the foreseeable future.

Add it all up and despite the stupid name change, Meta’s going to have to keep surviving on advertising, which is going to get a whole lot harder in a recession.

So forget cheap, Meta shares are destined to get cheaper still.

Ahead of the tape,

Lou Basenese

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Tags: Recession Metaverse